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Economies around the world are facing increasingly challenging fiscal landscapes. Rising debt burdens and slowing growth threaten to constrain fiscal policy for years to come. The trajectory of these economies will hinge on the policies they adopt—but amid the challenges, there are valuable lessons from recent success stories.
As debt piles up and global growth moderates under the weight of tariffs, geopolitical fragmentation, and demographic decline, policymakers find themselves operating in an increasingly challenging fiscal environment.
Total factor productivity has stagnated globally, and some emerging economies have experienced remarkable growth, while others are less productive than they were decades prior.
High debt amplifies growth challenges: It raises borrowing costs, heightens vulnerability to investor sentiment swings, and—when denominated in foreign currency—exposes countries to exchange rate volatility that can turn manageable obligations into full-blown crises. The result is a dangerous feedback loop in which high debt suppresses growth, and low growth makes debt ever harder to manage.
What is often missing from fiscal strategies is attention to an unsung driver of fiscal and development success: public spending efficiency. When governments cannot spend more, they must spend smarter. As highlighted in the 2025 IMF Fiscal Monitor, recently launched at CSIS, public spending efficiency is critical in today’s constrained fiscal environment. Efficiency can take two forms: extracting more from each dollar spent—for example, better health outcomes per health dollar—and optimizing the portfolio of spending itself: for instance, balancing education investment against public wage bills.
Yet many economies struggle to reach optimal efficiency due to fiscal rigidity—the inability to reallocate existing finances toward higher-priority areas due to political and legal constraints. This rigidity limits discretionary spending and undermines both growth and efficiency. Research shows that countries with lower corruption, robust rule of law, and less political polarization can adjust budgets more flexibly, meaning fiscal agility is derived from institutional quality.
Some may argue that efficiency is secondary to the absolute level of investment in critical sectors. Even if one accepts this, recent success stories suggest efficiency gains can unlock growth even in severely constrained environments.
The country expanded access to primary and secondary schooling while introducing a laptop program which provided 200,000 devices to Rwandan primary school students. By pairing accessibility with technology, Rwanda increased enrollment rates, digital literacy, and educational outcomes. These reforms were followed by an 8 percentage point increase in public spending efficiency on education. In a sector as pivotal as education, efficient spending can generate powerful spillover effects—raising productivity, improving health outcomes, and boosting domestic consumption. In this way, efficiency itself becomes a form of pro-growth investment, amplifying the fiscal multipliers embedded in high-impact sectors.
Croatia’s government increased revenue by broadening the tax base, removing exemptions, and adding public-health-promoting taxes, such as cigarette levies and mandatory car insurance. Croatia also incentivized cost control by transitioning from a payment per therapeutic procedure model (i.e., fee-for-service) to outcome-based diagnosis-related groups where the payer—in this case, the Croatian Health Insurance Fund—pays for a package of treatments and resources based on a patient’s diagnoses and other factors. Implementing digitization also improved operational efficiency and oversight. Croatia’s reforms are an exemplar for how to make difficult choices while satisfying constituents: While increasing revenue puts strain on taxpayers, realigning incentives to prioritize patient outcomes and improving operational efficiency matches expenditure with value. This is particularly crucial in politically sensitive sectors like healthcare.
Perhaps the most impressive example in recent years comes from Jamaica. The country reduced its debt-to-GDP ratio from 144 percent in 2012 to 72 percent in 2023, a remarkable achievement given average annual real growth below 0.75 percent and repeated natural disasters, including hurricanes, floods, droughts, and earthquakes, along with the Covid-19 pandemic. The International Monetary Fund (IMF) forecasts the ratio will fall below 60 percent this year and approach 50 percent by 2030.
Jamaica achieved this through fiscal spending rules with carefully designed escape clauses that balanced rigidity with flexibility, allowing debt reduction even during crises without harsh austerity. Strict austerity measures including spending reductions, higher taxes, and reduced public sector wages can be extremely unpopular and inflict severe economic distress upon communities as seen in Greece’s post Euro crisis recovery. Efforts to reduce political polarization and engage stakeholders through the National Partnership Council—composed of government officials, parliamentary opposition, and social partners—also ensured policy continuity across administrations, enabling sustained progress and collective buy-in.
Lessons on public spending efficiency in developing countries are highly relevant for the world’s largest economy. The United States spends nearly twice as much on healthcare as other advanced economies yet delivers worse life expectancy, chronic disease management, and preventable mortality outcomes. High spending and poor health outcomes are a disappointing pair; getting more health per dollar has become a fiscal and policy imperative.
Recent reforms in the U.S. target two major efficiency gaps: excessive prices and poor value allocation. The Inflation Reduction Act empowers Medicare to negotiate prices for high-cost drugs, limits annual price hikes, and requires inflation rebates—all designed to curb pharmaceutical spending growth. While still modest in scope, these steps are projected to generate substantial savings and establish a precedent for broader price discipline.
At the same time, new federal price transparency rules will require hospitals and insurers to disclose negotiated rates, allowing employers to compare costs when selecting plans for their employees. Some evidence suggests transparency can lower prices and foster competition, particularly when paired with usable data tools and enforcement. Meanwhile, hospitals and insurers are increasingly turning to artificial intelligence to identify administrative inefficiencies, streamline billing, and optimize patient scheduling—producing measurable cost reductions without sacrificing quality of care.
Shifting payment from fee-for-service toward value-based and preventive care also poses an opportunity for progress. The common fee-for-service model rewards volume over value, encouraging more procedures rather than better outcomes. Expanding alternative payment arrangements—such as accountable care organizations, bundled payments, and shared-savings models—can better align incentives with long-term wellness.
Taken together, drug price reform, transparency, and payment reform represent not austerity but optimization. By extracting more health from every dollar spent, the United States can expand fiscal space and deploy efficiency to achieve policy objectives.
Public spending efficiency is critical to the challenges facing economies worldwide, but success stories like Rwanda, Croatia, and Jamaica’s are products of specific institutional and political conditions. The United States and international financial institutions have long supported fiscal reforms in developing countries, but translating success from one context to another requires addressing three fundamental challenges:
Debates in development economics have long centered on whether countries need more resources or better use of existing ones. In the absence of fiscal space, the choice has already been made. The success of public spending efficiency in countries like Rwanda, Croatia, and Jamaica is built on smart institutional investments. To replicate these outcomes across the developing world, countries should prioritize institution-building, depolarization, and transparency-enhancing policies while avoiding onerous measures that increase spending rigidity. Inflexible wage bills, blanket subsidies, and politically motivated transfers may appear expedient in the moment, but they carry long-term costs. Just as the benefits of wise policies compound over time, so do the penalties of fiscal inefficiency. Ultimately, the ability to spend smarter—not just spend more—will determine which emerging markets escape the debt trap, and which remain caught in it.
Philip A. Luck is director of the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Michael H. Gary is a research intern with the Economics Program and Scholl Chair in International Business at CSIS.
