Nov 2019 Q1 aii.

The under-developed countries are very susceptible to three sources of instability which results from the nature of their economy and the logic of accelerated economic development.
a) Instability caused by world market developments;
b) Instability due to cyclical deficiency of effective demand in the short run, and
c) Instability caused by inflationary pressures

• The under-developed countries are more vulnerable to the effects of international cyclical fluctuations due to an unbalanced nature of their economic structure and heavy reliance on the export of primary products, as a source of their national income. This means any fluctuations in the international demand for their products, therefore, will tend to exercise a predominant effect on their national income through the medium of the foreign trade multiplier. Equally, as the under-developed countries export primarily raw materials, they import the finished manufactured goods from the developed countries and in the event of an international recession, the under-developed countries exporting primary products find that the resources in agriculture and some other primary industries are immobile in the short run and often continue to produce the same type and even quantities of output as before. But as the demand for these products are inelastic, it leads to a fall in the prices of these products in the international market leading to reduced export earnings which may affect the process of economic development in these countries adversely, as their own consumption requirements is very small due to their subsistence living.
• Specific fiscal instruments like export taxes are more useful as stabilisation measures than aggregative fiscal instruments such as a general sales-tax and income-taxation. These specific tax measures are more flexible in adjustment than income-tax and can also single out the export sector of the economy and counteract the destabilising influences that arise from it. Besides, they are relatively simple to administer and difficult to evade. But the contribution of export taxes to internal economic stability, and thus, economic development can be of great significance only if the under-developed countries are able to resist a high propensity to import consumer goods, especially luxuries and have the necessary skill not only in the
  manipulation of export and import taxes but also in timing the changes and channelling the proceeds for promoting their economic development.
• The stabilisation objectives of taxation should also aim at maximising the level of aggregate saving by applying a cut to the actual and potential consumption of the public at large. This stabilisation objective should aim at curbing the conspicuous consumption of the rich and force them to save for capital formation, which if maximised, should break economic stagnation and lead the country on the path of rapid economic growth.
• Another objective of the stabilisation policy of taxation should aim at protecting the economy of an under-developed country from the evils of inflation and depression as the under-developed countries have unusual susceptibility to inflationary pressures. Stagnation is regarded as too heavy and unacceptable a price to pay for achieving stability in prices. At the same time, large scale inflation as a means of promoting the economic development of the under-developed countries is beset with so many evils. Thus, the taxation policy for a developing economy should aim at curbing inflationary pressures inherent in a developing economy as in such an economy, there is always an imbalance between the demand for and supply of real resources.
• Equally, during depression, taxation along with other fiscal policy must operate in coordination with each other to offset it. Thus, taxation policy along with other fiscal policy measures are ideally suited to check inflation and depression in a developing economy. Taxation will be reduced in deflationary situation while during inflationary situation, taxation will be increased. If inflation is not controlled in time, it can undermine the very process of economic growth and development. As such, a suitable taxation policy for an under-developed country should be designed as to curb the demon of inflationary and deflationary situations which can prove ruinous to an underdeveloped economy