THE WORLD BANK

Developing countries entered the recent crisis in a much stronger macroeconomic and financial position than in the past. In general, they had much smaller fiscal and current ac-count deficits, lower inflation, higher international reserves, more flexible exchange rates, lower public and external debt, and less financial sector vulnerability (Canuto and Giugale 2010; Kose and Prasad 2010).2 Among middle-income coun-tries, the median ratio of general government debt to gross domestic product (GDP) almost halved, while in a sample of low-income countries (LICs), it fell even more precipitously, aided by substantial debt relief (figure 1). The global economic crisis that broke out in 2008 has reawakened interest in fiscal policy. In the early stages of the crisis, there was a widespread turn to countercyclical fiscal stimulus. Furthermore, the recent euro area crisis has underlined the importance of long-term fiscal sustainability for macroeconomic stability. More subtly, the global crisis has also refocused interest in fiscal policy as an instrument for longer-term growth and development. In the potentia