SWP605 Links between Taxes and comiiiiicGrowth Some Empirical Evidence Keith Marsden WORLD BANK STAFF WORKING PAPERS Number 605 FILE COi b P Y6 WORLD BANK STAFF WORKING PAPERS Number 605 Links between Taxes and Economic Growth Some Empirical Evidence Keith Marsden IITEIINATIONAL MONETMY FUND JOINT LL9RARY MAR 2 8 1984 INTERNATIONAL BANK FOR RECONSTMUCTION AND DEVELOPMENT WASHINGTON, D.C. 20431 The World Bank Washington, D.C., U.S.A. Copyright ( 1983 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. First printing August 1983 All rights reserved Manufactured in the United States of America This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. 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Both booklets are updated annually; the most recent edition of each is available without charge from the Publications Distribution Unit of the Bank in Washington or from the European Office of the Bank, 66, avenue d'1ena, 75116 Paris, France. Keith Marsden is operations adviser in the Industry Department of the World Bank. Library of Congress Cataloging in Publication Data Marsden, Keith. Links between taxes and economic growth. (World Bank staff working papers ; no. 605) Bibliography: p. 1. Taxation-Case studies. 2. Economic development-- Case studies. '. Title. II. Series. HJ2279.M37 1983 339 .V525 ,83-10323 ISBN 0-8213-0215-9 ABSTRACT Evidence from 20 countries shows that those with lower taxes experienced more rapid expansion of investment, productivity, employment, and government services, and had better growth rates--without discriminat- ing against the poor. This paper examines the mechanisms by which fiscal policies may have affected their performance. The author is indebted to Ranga Prasad for research assistance and has benefitted from comments on an earlier version of this paper by Peter Hansen, Hans Fuchs, John Johnson, Chad Leechor, Lyn Squire and Barend de Vries. LINKS BETWEEN TAXES AND ECONOMIC GROWTH SOME EMPIRICAL EVIDENCE TABLE OF CONTENTS Page ABSTRACT I.- INTRODUCTION ............................................. 1 II. COMPARATIVE PERFORMANCE OF SELECTED COUNTRIES .......... 2 III. FRAMEWORK OF ANALYSIS ................. 6 IV. EMPIRICAL ANALYSIS 8 A. Overall Tax/Economic Growth Links ......... 8 B. Investment ********.***.**.******.********.****.***.** 12 C. Employment and Labor Productivity ..................... 20 D. Innovation ............. 26 V. CONCLUSIONS ........ ............ 29 LINKS BETWEEN TAXES AND ECONOMIC GROWTH SOME EMPIRICAL EVIDENCE I. INTRODUCTION The arguments in the great tax debate are well known. Lower taxes should stimulate higher output by increasing incentives to save, to invest, to work hard, and to innovate. But, say the skeptics, will increased economic growth really occur? Moreover, since taxes are progressive, will not lower taxes mean that the rich benefit at the expense of the poor, who are more dependent upon the social services financed out of tax revenues? A review of the experience with growth and taxation in 20 countries, spanning almost the entire spectrum of world incomes, does not pretend to answer these questions, but it sheds some light on their empirical foundation. The countries in question were Brazil, Cameroon, Chile, Jamaica, Japan, the Republic of Korea, Liberia, Malawi, Mauritius, New Zealand, Paraguay, Peru, Singapore, Spain, Sweden, Thailand, United Kingdom, Uruguay, Zaire, and Zambia. Half the countries selected had tax revenues (relative to GDP) below the average for their income groups during the 1970s, while the other half had tax/GDP ratios above. The choice of countries was constrained by data availability and by the exclusion of OPEC members and other countries which have used non-tax instruments (such as state marketing boards) - 2 - extensively for revenue purposes. The selected countries were grouped into 10 pairs with similar per capita incomes but contrasting tax levels, and their growth rates over the past decade were then compared. Data for the U.S. were added for reference. Tax levels in the U.S. were below average (although the inclusion of state and local government taxes, for which data are not available for most countries, might put it into the high-tax category). The economic structures of the countries covered are not identical of course. Some have better tax "handles" or tax "potential" than others. But because it is administratively easier to extract higher levels of tax from certain sectors and activities does not mean that it is desirable to do so from the point of view of long-term economic development. This depends, first, on the impact of higher taxes on incentives and output in the sectors subject to tax and second, on whether government uses its additional revenues efficiently. This paper focuses primarily on the first issue. II. COMPARATIVE PERFORMANCE OF SELECTED COUNTRIES In all cases, the countries that imposed a lower effective average tax burden on their populations achieved substantially higher real rates of growth of gross domestic product (GDP) than did their more highly taxed counterparts (Table 1). The average (unweighted) annual rate of growth of GDP was 7.3 percent in the low-tax group and 1.1 percent in the high-tax group. In the U.S. it was 3.1 percent. Every member of the low-tax category, including three from Africa (Malawi, Mauritius, and TABLE 1 COMPARATIVE PERFORMANCE OF SELECTED LOW-TAX AND HIGH-TAX COUNTRIES AND THE U.S. Real average annual growth rates, 1970-79 2 Share of Nonagricultural Share of poorest Per Capita (in Percent) Gross Domestic employment Life expectancy 40 percent Income Gross Investmnt index at birth in total income Groups Consumption domestic Labor Labor in GDP 1970-100 in years (In percent) Country US dollars 1979 GOP Public Private investment Exports force productivity 1960 1979 1978 1960 1979 latest years Malawi (lov-tax) 200-300 6.3 6.1 5.7 2.3 4.6 2.2 4.1 10 29 173 37 47 21.5 Zatre (high-tax) -0.7 -2.2 -1.8 -5.0 -1.1 2.1 -2.8 12 9 - 40 47 Cameroon (low-tax) 500-600 5.4 5.4 5.3 7.9 0.5 1.3 4.1 - 25 154 37 47 Liberia (high-tax) 1.8 2.3 4.3 5.2 2.3 2.6 -0.8 28 27 146 44 54 10.9 Thailand (low-tax) 500-600 7.7 9.1 6.9 7.7 12.0 2.7 5.0 16 28 1651/ 51 62 19.1 Zambia (high-tax) 1.5 1.8 -2.2 -5.6 -0.7 2.4 -0.9 25 21 tt07/ 40 49 10.1 Paraguay (low-tax) 700-1100 8.3 4.8 7.4 18.7 8.4 3.1 5.2 17 29 1353/ 56 64 Peru (high-tax) 3.1 6.5 2.9 2.7 1.7 3.0 0.1 25 14 1267 48 58 7.0 Mauritius (low-t ax) 1100-1300 8.2 13.5 9.8 16.1 - - 30 38 1623/ 60 65 14.0 Jamaica (high-tax) -0.9 8.0 -0.6 -9.6 -6.8 2.2 -3.1 30 18 III!/ 64 71 8.2 Rep, of Korea (low-tax) 1400-1700 10.3 8.7 8.0 14.9 25.7 2.8 7.5 11 35 172 54 63 16.9 Chile (high-tax) 1.9 -0.5 1.9 -2.0 10.7 1.9 0.0 17 16 -- 57 67 13.4 Brazil (low-tax) 1700-2100 8.7 8,6 9.1 10,1 7,0 2,2 6.5 22 23 1654/ 55 63 7.0 Uruguay (high-tax) 2.5 1.5 (G) 7.5 4.3 0. 1 2.4 18 17 94!/ 68 71 Singapore (low-tax) 3800-5950 8.4 6.4 7.2 6.0 11.0 2.7 5.7 11 39 150 65 71 New Zealand (high-tax) 2.4 - -- - 3.4 2.1 0.3 24 22 112 72 73 Spain (low-tax) 4300-6350 4.4 5.6 4.4 2.5 10.8 1.1 3.3 19 20 -- 68 73 17.8 United Kingdom (high-tax) 2.1 2.8 1.7 0.8 8.2 0.3 1.8 19 19 101 71 73 19.1 Japan (low-tax) 8800-11,950 5.2 5.0 5.3 3.2 9.1 1.3 3.9 34 33 114 68 76 21.0 Sweden (high-tax) 2.0 3.2 2.0 -1.1 2.6 0.3 1.7 25 20 109 73 76 19.7 United States 10,630 3.1 1.7 3.6 1.9 6,9 1.8 1.3 18 19 121 70 74 15.2 Sources: World Bank. 1981 World Bank Atlas; World Development Report 1981; and Accelerated Developsent in Sub-Saharan Africa (Wasthngton, D.C., 1981.) IMF, International Financial Statistics Yearbook 1981 and Government Finncal Statistic Yerboo.S Volume V (washingtoa, D.C., 1981.) International Labor office, IL Yearbook of Labour Statistics. 1980. -- Indicates data are not available. (.) IndLcates data less than half the unit shown, I/ 1971-100. 1/ 1977. 3/ 1972-100. T/ 1975. S/ 1973-100. -4- Cameroon), exceeded the economic growth of the most rapidly expanding economy (Peru) in the high-tax category. Yet in most of sub-Saharan Africa (except Nigeria), GDP grew by only 1.6 percent per annum during the decade compared with 6.2 percent for Latin America and the Caribbean. Although--with three exceptions (Zaire, Jamaica and the United Kingdom)-- tax/GDP ratios rose during the period under review, the year-to-year variations were small and the relative tax positions of the low-tax and high-tax countries remained unchanged. The rise seems mainly to reflect a broadening of the tax base rather than an increase in tax rates in the low-tax group, although it did coincide with a general slackening of economic growth during the second half of the decade. The average tax/GDP ratio in the low-tax group increased from 13.3 percent at the beginning of the decade to 15.2 percent at the end; it rose from 21.0 percent to 23.9 percent in the high-tax group. In the U.S. the increase was from 18.0 percent to 19.5 percent. Higher rates of economic growth allowed a substantial rise in real living standards in the low-tax countries, shown by their higher levels of private consumption. At the same time', growth expanded the tax base and generated increased revenues, which financed more rapid expansion of expenditure on government services such as defense, health, and education in all the low-tax countries except in the Paraguay/Peru pairing. In Peru, faster growth of public services was achieved at the expense of both private consumption and investment. Rising government expenditure on public services is no guarantee of their quality nor an indication of whether they reach those who need them most. Moreover, government does not provide all services in all countries. Some are provided through private channels (market and nonmarket); support for the aged, the sick, and the unemployed, for instance, is a responsibility of the extended family in many societies. So the impact of different economic systems on social objectives is best measured by the end results. Life expectancy is an important basic indicator of progress in reducing poverty, because it is the poor who are most afflicted by deficient diets, polluted water supplies, and inadequate health services which cut short their lives and bring the average down. In all the countries covered, life expectancy at birth rose over the past two decades and the improvement was greatest in low-income societies. The increases averaged 8.0 years in low-tax countries and 6.2 years in high-tax countries. By 1979, the overall levels in the two groups were about the same (63.1 years and 63.9 years, respectively). Infant mortality rates as well as those for children and adults fell in both groups. Direct information on changes in the incomes of different social groups is scarce and not very reliable. However, available data on income distribution seem to refute the argument that countries with high taxes are more equitable than those with low ones. The share of the poorest 40 percent of households in total income remained relatively high in five fast growing low-tax countries: Japan, the Republic of Korea, Malawi, Spain, and Thailand, ranging between 16.9 percent and 21.5 percent. In the U.S. it was 15.2 percent in 1972. -6 - III. FRAMEWORK OF ANALYSIS What accounts for the superior economic performance of the low-tax countries? The level of taxation is clearly not the only factor. Development is complex. Its pattern can be influenced by many variables, endogenous and exogenous. Growth has been retarded in some countries by political instability and by a deterioration in their terms of trade. Inflation, high interest rates, the oil price hikes and trade barriers have made progress difficult for most countries. Nations' responses to fiscal measures are influenced by the faculties, motivations, and mores of their peoples. The "quality" of the tax system is important. A country with a higher'tax/GDP ratio but a favorable tax structure may outperform a country with a lower overall tax level that discourages growth-promoting activities, or imposes an excessive burden on the most productive or innovative segments of the population. Other important considerations include the complexity of the tax system, the efficiency and integrity of its administration, and the degree of horizontal and vertical equity (within as well as between income groups) But the links between fiscal policy and economic growth are there, if mostly indirect--operating through the capital, labor, and product markets. Taxation affects the amount of capital available by encouraging or discouraging domestic savings and foreign investment. It may also divert investment and labor from one sector to another. It affects the level and productivity of employment by influencing individual choices between work and leisure (or housework), the intensity of effort on the job and employers' decisions on technology. Taxes affect a firm's -7- ability to diversify and expand through their impact on input costs and managerial behavior. They may also have a bearing on less tangible factors such as entrepreneurship and technical progress. Some empirical evidence suggests causal relationships between the level and types of taxes and key growth determinants in the areas of investment, exports, employment, productivity, and innovation. This evidence is partly qualitative, based upon field surveys and observation of economic behavior by analysts and development institutions. Some econometric findings can be cited from our own analysis of the sample data and other published studies. But, as Martin Feldstein (1982) has pointed out, "the complexity of economic problems, the inadequacies of economic data and the weaknesses of the restrictions imposed by general economic theory together make it impossible to apply in practice the textbook injunction to estimate a "true" model within which all parameter values can be inferred and all hypotheses tested. Learning in economics is a more complex and imperfectly understood process in which we develop judgments and convictions by combining econometric estimates, theoretical insights and institutional knowledge." The aim of this paper is to identify some of the links that seem to be significant, to indicate the direction of the responses, to estimate their magnitude wherever possible and to discuss the nature of the relationships. The broad statistical correlation between tax levels and economic growth is examined first. This is followed by a more detailed review of the principal variables. -8- IV. EMPIRICAL ANALYSIS A. Overall Tax/Economic Growth Links The impact of taxes, taken as policy variables, on economic growth has been investigated by the use of regression analysis, based upon average tax/GDP ratios in the selected countries during the 1970s (Table 2) and the data included in Table 1. The overall results are given in Table 3. As shown in equation (1), the regression coefficient of the total tax variable is negative and significant at the 1 percent level. The coefficient indicates that an increase of one percentage point in the tax/GDP ratio decreases the rate of economic growth by 0.36 percent points. The R2 estimate shows that 45 percent of the intercountry variance in GDP growth is explained by differences in the overall tax burden. Fitting the tax variable into a production function equation (2), incor- porating gross domestic investment and the labor force, raises the R2 to 0.78 but reduces the coefficient of the tax variable to -0.14. Its t-value is also reduced because of intercorrelation between the variables but remains significant at the 10 percent level. Table 3 also presents the results for 10 lower income countries, with a per capita GNP of less than $1,300 in 1979, compared with 10 higher income countries with a per capita GNP of $1,400 or above. The tax coefficients are substantially larger for the first group, with values of -0.57 when regressed independently against GDP growth and -0.30 when combined with investment and labor force growth. The equivalent coefficients for higher income countries are -0.34 and -0.08. Except for the last figure, the t-values are significant at the 5 percent level or higher. TABLE 2 AVERAGE RATIOS OF MAIN TAXES TO GDP IN SELECTED COUNTRIES. 1970s Taxes on Total tax revenue1l/ Taxes on incomes Social Security Domestic taxes interna- as percentage of and profits and on goods tional trade Other Country GDP , Total Companies payroll tax and services Imports Exports taxes Malawi 11.8 5.2 3.3 - 3.9 2.6 - .1 Zaire 21.5 5.8 2.4 0.8 2.7 5.5 6.2 0.8 Cameroon 15.1 2.6 0.9 1.3 3.0 5.8 1.4 1.1 Liberia 21.2 8.5 5.2 - 4.8 6.8 0.1 0.9 Thailand 11.7 2.0 1.1 - 5.9 3.0 0.6 0.3 Zambia 22.7 12.2 4.8 0.6 8.2 2.0 - 0.0 Paraguay 10.3 1.3 1.0 1.4 2.5 1.9 0.1 3.1 Peru 14.4 3.1 2.1 0.6 6.2 2.4 0.9 1.1 Mauritius 18.6 5.7 2.7 - 3.5 6.1 2.4 0.9 Jamaica 23.8 7.2 2.4 1.5 11.9 1.7 0.2 1.4 Korea 14.2 4.1 2.2 0.1 6.8 2.3 - 0.8 Chile 22.4 4.4 1.6 4.2 9.8 2.3 - 1.7 Brazil 17.1 3.0 1.2 6.9 6.1 0.7 0.3 0.1 Uruguay 20.0 1.6 0.9 6.2 8.2 1.5 0.6 2.1 Singapore 16.2 7.2 3.3 0.4 3.7 2.0 - 3.0 New Zealand 27.5 19.9 3.7 0.2 5.6 1.1 - 0.7 Spain 19.1 3.9 1.7 9.2 3.8 2.0 - 0.2 United Kingdom 30.4 14.4 2.6 6.2 8.8 0.3 - 0.8 Japan 10.6* 7.4 3.5 - 2.3 0.3 - 0.6 Sweden 30.9 7.8 1.3 11.5 10.6 0.5 - 0.5 United States 18.5 11.4 2.8 5.4 1.1 0.3 - 0.4 Sources: IMF, Government Finance Statistics Yearbook 1981 and International Financial Statistics Yearbook, 1981. 1/ Central government tax revenue only. * Includes non-tax revenue but excludes social security contributions. - Indicates none recorded. - 10 - TABLE 3 INTERCOUNTRY REGRESSION ANALYSIS OF GDP GROWTH RATES FOR SELECTED COUNTRIES, 1970-79 a/ Gross Total domestic No. of tax/GDP investment Labor force Regression equations observations Constant ratio growth rate growth rate n T K L R2 Total Sample (1) 20 11.281 -0.361 .449 (6.011) (-3.830) (2) 20 5.267 -0.136 0.316 0.221 .779 (2.183) (-1.581) (4.892) (0.438) Lower Income Countries (la) 10 13.914 -0.575 .660 (5.368) (-3.944) (2a) 10 9.847 -0.299 0.246 -0.688 .882 (2.616) (-2.333) (3.332) (-0.670) Higher Income Countries (lb) 10 11.797 -0.336 .518 (4.710) (-2.932) (2b) 10 3.284 -0.084 0.335 1.223 .877 (1.310) (-0.934) (2.937) (0.935) a/ The t-values are given in parenthesis below the regression coefficients. - 11 - The results suggest that taxes affect growth in two ways: first, by influencing the aggregate supply of the main factors of production by raising or lowering their net (after tax) returns and second, by influencing the efficiency of resource utilization (total factor productivity). Equations (2), (2a) and (2b) isolate the effects on factor productivity, because the impact of taxes on aggregate factor supply is already reflected in the input data for investment and labor force growth. A possible explanation for the larger and more significant coefficients for lower income countries is that these countries offer greater scope for productivity gains from the spread of modern technology, improvement in skills and the transfer of capital and labor to more productive sectors and activities. They may also benefit to a greater extent from "externality effects." The application of more efficient management and production techniques in leading sectors (such as exports) eventually results in higher productivity in the backward sectors through emulation and the dissemination of know-how. In higher income countries, productivity differences between sectors tend to be narrower and the existing levels of efficiency higher. Structural and institutional rigidities that limit the mobility of resources or retard the acceptance of new techniques may restrict their potential for tax-induced gains. Regression analysis was also undertaken for changes in life expectancy, taken as a proxy for poverty alleviation. However, no significant correlations were found with the growth of GDP or public consumption, nor with the tax/GDP ratios. High-tax countries may have compensated for lower rates of income growth by larger transfer payments to the poor. In the long run, economic growth is likely to be decisive, - 12 - however, as the cross-sectional data show that average life expectancy tends to rise with per capita GNP. We turn now to a more detailed review of some of the principal growth determinants. B. Investment Gross domestic investment grew at qubstantially higher rates in the low-tax countries, averaging 8.9 percent annually, compared with an annual decline of 0.8 percent in high-tax countries. Our regression analysis relating investment growth to variations in tax/GDP ratios gives a coefficient of -0.66, indicating that an increase in the total tax ratio of 1 percentage point lowers the rate of growth of investment by 0.66 percent- age points (Table 4). Among the different types of tax, corporate income tax shows the highest coefficient at -2.13, significant at the 10 percent level. Corporate taxes and social security contributions combined were generally lower in the low tax countries (Table 2), allowing companies to retain a higher proportion of their earnings to finance internal expansion. Martin Feldstein and George Fane (1973) have shown from British data that the long-run propensity to consume out of disposable personal income is considerably higher than for retained earnings. They estimate that a tax policy that reduces dividends by one Pound and increases retained earnings by an equal amount may raise total private saving by as much as 0.6 Pounds. Using an 800 equation model based upon U.S. experience, Otto Eckstein (1980) estimates that a progressive reduction in corporate profit taxes by 15 to 33 percent over a 10 year period would increase business TABLE 4 INTERCOUNTRY REGRESSION ANALYSIS OF THE GROWTH OF INVESTMENT. LABOR FORCE, LABOR PRODUCTIVITY AND EXPORTS IN RELATION TO TAX RATIOS IN SELECTED COUNTRIES. 1970-79 a/ Soc.Sec. and Dom. tax on Foreign Regression Dependent Number of Total tax/ Corporate Personal other payroll goods and trade equations variable observations Constant GDP ratios tax income tax taxes services taxes R2 (Tt) (Tc) (Tp) (Tss) (Td) (Tf) (1) Investment 20 16.644 -0.657 .310 growth rate (3.624) (-2.847) (2) Investment 20 21.229 -2.127 -0.298 -0.373 -1.338 -0.601 .454 growth rate (3.565) (-1.373) (-0.651) (-0.685) (-2.220) (-1.076) (3) Labor force 20 3.385 -0.076 .270 growth rate (5.748) (-2.583) (4) Labor force 20 2.600 0.040 -0.065 -0.189 0.013 -0.032 .574 growth rate (3.969) (0.236) (-1.284) (-3.150) (0.197) (-0.513) (5) Labor product- 20 7.819 -0.284 .332 ivity growth (4.133) (-2.989) rate (6) Labor product- 20 10.775 -0.803 -0.154 -0.075 -0.638 -0.580 .571 ivity growth (4.880) (-1.398) (-0.909) (-0.373) (-2.856) (-2.803) rate (7) Exports growth 20 13.444 -0.392 - .130 rate (2.822) (-1.639) (8) Exports growth 20 17.703 -0.899 -0.286 -0.224 -0.741 -1.088 .253 rate (2.753) (-0.538) (-0.578) (-1.139) (-1.139) (-1.804) a/ The t-values are given Ln parenthesis below the regression coefficients. - 14 - investment by 15.6 percent and the capital stock by 9.9 percent. In a separate study, Roger Gordon and Dale Jorgenson (1974) estimate that an increase in the investment tax credit from 7 percent to 15 percent would raise the capital stock by 12.5 percent over a 10-year period. Lester Thurow (1980) goes as far as to recommend the abolition of corporate income tax and the integration of corporate and personal taxation, on the grounds of both efficiency and equity. He argues that since the corporate after-tax rate of return would approximately double, corporate managers would have a strong incentive to increase investment. While each shareholder, rich or poor, would pay taxes at a rate commensurate with his own income position rather than at a common rate. Michael Darby (1979) estimates from U.S. time series data that social security programs have reduced total saving by between 12 and 23 percent, because individuals have less need to accumulate life-cycle assets for their old age. Combined with effects on labor supply (through induced early retirement), his calculations of the long-run equilibrium effects suggest that owned capital is reduced from 5 percent to 20 percent and income lowered by 2 percent to 7 percent. Feldstein (1974) had earlier estimated that social security reduced U.S. saving and investment by 38 percent. There is also evidence that tax policy has influenced the pattern of investment with consequent effects on overall efficiency. Generous corporate tax holidays and import duty concessions have been offered by low-tax countries to investors in priority areas, particularly exports where economic returns have been shown to be high. Several econometric studies have revealed a close correlation between exports and income - 15 - growth. Bela Balassa (1978) estimated that the growth of the Republic of Korea, for example, would have been 43 percent lower than it actually was if Korea's exports had only matched the average for a sample of ten countries. William Tyler (1981) found a significantly positive relationship (a Pearson coefficient of 0.55) between the growth of manufactured exports and economic growth in 49 countries. Our own regression analysis of the growth of exports, using tax ratios as independent variables, gives coefficients of -0.39 for total taxes and -1.09 for foreign trade taxes. Production for export as well as for domestic consumption encourages efficient allocation of resources, permits the exploitation of economies of scale, generates technological improvements in response to competition abroad and contributes to increased employment. Furthermore, the strong growth and balance-of-payments positions that countries can attain by promoting exports enable them to borrow abroad to supplement domestic savings. Trade policy analysts emphasize the importance of fiscal incentives for export promotion. Donald Keesing (1979) states that "Duty-free access to imported inputs, together with rebates of all indirect taxes, are in fact nearly universal in countries, whatever their income levels, that are successful in exporting manufactures. Any significant tax on these inputs can knock a country out of the running as a source of these goods." The ratio of total indirect taxes and duties to GDP was lower in low-tax countries in all the pairs included in our sample. Exports rose more rapidly in all the low-tax countries except Cameroon, expanding at an average annual rate of 9.9 percent compared with 2.5 percent in the high-tax group. Tax alleviation offered to exporters has proved to be - 16 - attractive to domestic and foreign sources of capital. The tax concessions provided under the Export Processing Zone Act in Mauritius, for example, resulted in a sharp upsurge in investment in manufacturing for export during the 1970's. The share of manufactures in total exports rose from 2.9 percent in 1970 to 26.7 percent in 1978. Net direct foreign investment. was significant in all low-tax developing countries. It quadrupled in Brazil and tripled in Singapore between 1970 and 1977. The share of investment in GDP rose in all the low-tax countries, except Japan, reaching .an unweighted average of 29 percent in 1979. In contrast, most high-tax countries experienced a secular decline in their investment ratios, which fell to an average of 18 percent in 1979. In some cases, taxes on major export commodities deterred foreign investors and diverted domestic capital into unproductive activities, such as real estate speculation. World Bank data for 1970 and 1977 show negative direct foreign investment in some high-tax countries. Malcolm Gillis (1981) has shown that in the late 1960s and early 1970s, several governments began aggressive efforts to wrest larger shares of resource rents from the transnational corporations engaged in natural resource extraction in their countries. The liberal tax incentives that had been offered previously, such as exemptions from company tax and import duties, were abandoned. Ad valorem export taxes and windfall profits taxes were introduced. Depletion allowances and loss-carry-forward provisions were eliminated. Gillis points out that these measures were often successful in maximizing revenues in the short run but were disappointing in their long-term effects on the development of the mineral sectors in these countries. In Jamaica, for example, the real value of bauxite/alumina - 17 - production fell by 37 percent in 1975-76 following the introduction of the bauxite production levy in 1974. Foreign aluminum producers reacted to higher prices resulting from the levy by diversifying their sources of supply. Jamaica's share in the world bauxite and alumina trade declined from 18 percent and 10 percent in 1974 to 13 percent and 7 percent in 1979. Vito Tanzi (1981) has also drawn attention to the high ratios of export duties to export values and GDP in Zaire and some other African countries. He notes that the high share of export duties in GDP may be considered particularly disturbing in view of the negative effects that these taxes often have on production, allocation of resources and exports." These effects may be mitigated if the taxes are temporary, but this was not generally the case. Formal systems for providing tax exemptions or rebates to exporters exist in some high-tax countries but are often ineffective because of weak administration or over-complicated procedures. Trade specialists also stress the role of overvalued exchange rates, which act as a hidden tax on exporters, in hampering growth. It has been suggested that the decline in real export prices for primary products, particularly minerals such as copper, provides a more powerful explanation for poor economic performance than does fiscal policy. However, data for changes in the terms of trade do not support this contention (Table 5). Among the four major copper exporters included in the high-tax group--Chile, Peru, Zaire and Zambia--only Chile experienced a greater long-run deterioration in the purchasing power of its exports than did its low-tax, high growth counterpart, and it still fared better than Japan and Thailand in this respect. The difference between the two groups as a whole was minimal. The terms of trade index in 1979 was on - 18 - TABLE 5 CHANGES IN THE TERMS OF TRADE AND MARKET SHARES OF SELECTED COUNTRIES Country Terms of trade index Market shares (1970 - 100) (exports as % of world imports) % change 1960 1979 1979 over 1960 1970 1979 Malawi 115 84 -27 0.02 0.02 Zaire 122 91 -25 0.25 0.17 Cameroon 106 144 +36 0.08 0.07 Liberia 255 83 -67 0.07 0.03 Thailand 121 73 -40 0.25 0.34 Zambia 115 100 -13 0.34 0.09 Paraguay 116 101 -13 0.02 0.02 Peru 89 97 + 9 0.35 0.21 Mauritius 65 59 - 9 0.02 0.02 Jamaica 85 93 + 9 0.11 0.05 Korea 99 94 - 5 0.28 0.97 Chile 126 89 -29 0.42 0.24 Brazil 114 94 -18 0.92 0.99 Uruguay 132 126 - 5 0.08 0.05 Singapore 100 101 + 1 0.52 0.91 New Zealand 135 124 - 9 0.41 0.30 Spain 124 100 -19 0.80 1.17 United Kingdom 112 107 - 4 6.48 5.54 Japan 150 98 -35 6.47 6.56 Sweden 97 90 - 7 2.27 1.77 U.S.A. 115 91 -21 14.49 11.67 Sources: World Development Report 1981, table 8, and International Financial Statistics, Supplement on Trade Statistics 1982. - 19 - the average 13 percent below the level in 1960 in the low-tax countries and 14 percent below in the high-tax group. Tyler also found no readily apparent relationship between terms of trade changes and economic growth in his larger sample of countries. However, the low-tax countries succeeded in expanding and diversifying their exports. With one exception (Cameroon), they increased or maintained their share of world markets. On the other hand, the share of the high-tax countries dropped in all cases. The sharpest falls coincided with negative GDP growth. Tax policies have influenced their ability to compete in world markets by squeezing profits, by making it more attractive for entrepreneurs to concentrate on protected home markets, by raising costs in potential export areas and by discourag- ing foreign investors who would have brought marketing, technological and managerial know-how needed for export success. In some countries, dividend taxes acted as a "double tax" on corporate income, reducing the total amount of investment funds available and discouraging corporate investment. This has been confirmed by a recent econometric study by James Poturba and Lawrence Summers (1981) using U.K. data. The authors conclude that "the data decisively refute the hypothesis that by raising the cost of paying out funds to shareholders, dividend taxes encourage investment through retentions." There is also econometric evidence of a shift in investment flows from plant and machinery to owner-occupied housing, which is more favored by tax rules. Martin Feldstein (1981, 1982) has demonstrated that this diversion has been accentuated by inflation. Because nominal interest payments are deductible, the tax advantages of investment in owner-occupied housing rise substantially with inflation. In contrast, inflation tends to - 20 - increase the tax burden on business capital. First, because deductions for fixed investment are calculated according to historic costs, a higher rate of inflation reduces their real value and understates the costs of replace- ment. Second, the owners of the equity of business firms often pay capital gains tax on the rise in the nominal value of the capital stock. Feldstein concludes that the heavier tax burden resulting from the interaction between tax rules and inflation explains most ot the decline in the share of GNP devoted to investment in plant and machinery in the U.S since 1965. He estimates that the reduction exceeds 40 percent of the rate of business investment in recent years. It has also been suggested that interest rates have been driven up in countries that allow interest rate deductions for tax purposes, while taxing interest and dividend income. The demand for funds is increased by the interest subsidy, while the supply of financial capital is dampened by the tax on "unearned" income. It is widely believed that economic growth has been negatively affected by the high interest rates in recent years. Eckstein (1980) shows that the rental price of capital rose rapidly in the 1970's due to the response of long-term interest rates to inflation. This had a substantial negative effect on investment in plant and equipment. The mean elasticity of investment in plant and equipment in 24 industries with respect to the rental price of capital was found to be 0.8. Inflation rates were higher in high-tax countries in seven out of the ten pairs during the decade. C. Employment and Labor Productivity Nonagricultural employment rose more rapidly in low-tax countries. So did productivity (GDP per member of the labor force), by - 21 - 5.0 percent a year on the average compared with a decline of 0.1 percent in high-tax countries. This latter figure probably reflects growing unemployment and underemployment but data are lacking for most countries. Policies providing exporters with duty-free imported inputs facilitated the growth of exports in low-tax countries, particularly labor-intensive manufactures where competitive material costs are critical for successful penetration of international markets. This accelerated the transfer of underemployed agricultural workers into more productive jobs in industry and related services. Employment and productivity also responded positively to higher levels of investment noted earlier, spurring the process of capital deepening (higher capital/labor ratios) and allowing wider adoption of modern technology. Our regression analysis of labor productivity growth against total taxes gives a coefficient of -0.28, significant at the 1 percent level. The highest coefficients among the individual taxes are -0.80 for corporate tax, -0.64 for domestic taxes on goods and services and -0.58 for foreign trade taxes. Productivity has also been raised through education and training. Government expenditure on education increased faster (in constant dollars per capita) in low-tax countries in five out of the six pairings for which data are available. It actually declined in three high-tax countries--Peru, Uruguay, and Zambia. Moreover, growth-promoting strategies encourage individual families to contribute to the cost of their members' education directly, because better-paying jobs are created rapidly. George Psacharopoulos (1980) has shown that private returns to education are high in several countries. Similarly, faster growing markets induce firms to finance their own training programs. - 22 - In high-tax countries, on the other hand, high tariff protection, mostly on finished goods, often removed the competitive stimulus for efficiency in the production of domestic substitutes and frequently led to failure to achieve economies of scale in areas of potential comparative advantage. This has been recognized by trade and fiscal experts. For instance, Aguirre, Griffith and Yucelik (1981), in their review of African experience, state that the mixing of revenue and protective functions has led to excessive levels of protection, resulting in damaging effects on resource allocation. In Zaire, for example, import duties represented 21-28 percent of the total value of imports during the 1970s, compared with 6-10 percent in Malawi. The standard rate was 40 percent in the former, 15-20 percent in the latter. Moreover, a proliferation of exemptions or lower tax rates on imported intermediate goods and capital goods has meant that the effective protection of import substitutes is a good deal higher than immediately apparent protection. This is particularly true for industries producing batteries and cosmetics, and for assembly plant enterprises where the nominal tariff on the imported final product is high and the share of domestic value added tends to be low. Paradoxically, efficiency in some import-substitution industries has also been undermined by smuggling which is often rife in countries with high tariffs and quantitative controls on imported consumer goods. Smuggling reduces demand for domestic production and can be a major cause of under-utilization of plant capacity and consequent waste of capital. Low capacity-utilization rates and high incremental capital/output ratios have been noted frequently in the reports of international agencies. Manufacturing output grew more slowly in high-tax countries in all but one of the pairs - 23 - (Cameroon/Liberia), averaging only 1.5 percent annually compared with 9.1 percent in low-tax countries. In the U.S. it averaged 2.9 percent during the decade. A further consequence of distorted tariff structures is that the domestic production of essential food items has been discouraged by negative effective protection resulting from low or zero nominal duties on imported food and high domestic value added, combined with overvalued currencies which, in effect, subsidize imports. Agricultural output growth averaged 3.1 percent in low-tax countries compared with 1.5 percent in the high-tax group, although there were obviously other factors involved, including pricing policy and climatic conditions. Employment growth has been retarded in some high-tax countries by payroll and sales taxes, which have pushed up the cost of labor. In Zambia, for instance, sales and excise taxes on cigarettes, beer, and gasoline reached 10.5 percent of GDP in 1978. The bargaining power of workers with scarce skills allowed them to demand increased wages to compensate for the higher prices of such "luxuries," thus making their products less competitive on world markets and limiting their opportunity to diversify output into manufactures to lessen their dependence on agriculture and mining. The data gathered by the International Labor Office (ILO) show that average monthly earnings in nonagricultural sectors were $164 for Zambians and $738 for expatriates in Zambia in 1976, compared with $129 in Korea which had a per capita income nearly three times that of Zambia. A similar phenomenon has been noted in industrialized countries. Assar Lindbeck (1982) points out that not only are various types of - 24 - indirect taxes shifted onto the prices of final output, but private agents try to compensate themselves, in the form of higher nominal factor prices, for reductions in real after-tax income due to actual or expected tax increases. These first and second round effects have been baptized '.tax-shift inflation." Total indirect taxes on goods and services averaged 7.4 percent in low-tax countries and 10.8 percent in high-tax countries. Lindbeck argues that not only increased tax rates, but also high tax rates can contribute to cost inflation. In particular, in societies with high marginal tax rates, very large money wage increases are necessary to achieve even quite modest increases in real disposable income, or to compensate for even quite modest price increases. He also suggests that higher taxes depress output through negative effects on productive effort --- "the ambition to strive for promotion, the willingness to shift from one job or geographical region to another, the desire to invest in human capital." Our regression results indicate significant relationships between labor force growth and tax levels. For the total tax/GDP ratio, a coeffi- cient of -0.08 is found significant at the 1 percent level. Social security and other payroll taxes have the highest coefficient (-0.19) among the individual taxes, with a t-value of -3.15. The coefficient is -0.06 for personal income tax, but the t-value of -1.28 falls just below the 10 percent level. In the poorer countries, relatively small differences in the income tax/GDP ratio can have a substantial impact on individual tax burdens and work incentives because its incidence is generally confined to a relatively small group engaged in the modern sector. As Aguirre, - 25 - Griffith, and Yucelik (1981) have noted, withholding income tax at source tends to create a de facto tax bias against employees, particularly government workers. If wage and salary earners feel that they are being discriminated against, both productivity and the availability of national technical manpower may be adversely affected. The tax .bite taken from relatively low public sector salaries also encourages "moonlighting" by civil servants in unofficial activities. This slows down the machinery of government, with negative repercussions on efficiency in the private sector, especially in economies where licenses and other government controls are pervasive. Heavy taxation of the professions has also contributed to the brain drain from developing countries. There is some evidence from more affluent societies that people will work more if income taxes fall, but may prefer leisure if taxes rise. Otto Eckstein (1980) estimates that the elasticity of the labor force with respect to the personal tax burden is -0.04 in the U.S, indicating that a 1 percent rise in the real tax burden discourages 0.04 percent of U.S. workers from the labor force. He estimates that a 50 percent increase in the real tax burden since 1965 has driven 1.9 million from the labor force. L. Godfrey (1975) reviewed several econometric studies of the effects of taxation on the supply of labor in OECD countries. He found an elasticity of substitution between 0.20 and 0.25 for males and between 0.5 and 1.5 for females. An increase in the net wage (resulting from a decrease in taxes) increases the cost of leisure in terms of foregone income. This change in the cost of leisure causes individuals to substitute work for leisure. The substitution effect is a positive one in that it brings about changes in labor supply in the same direction as the - 26 - change in the net (after-tax) wage. Richard Goode (1976) also has suggested that with high tax rates, labor can be expected to shift toward occupations and working arrangements that are subject to relatively light taxation. This may result in a maldistribution of labor in terms of its contribution to development goals. Assar Lindbeck notes that high tax rates can foster an "underground economy" where incomes are not reported at all to the tax authorities and encourage zero-sum games of search for tax loopholes and profitable financial speculation. Ratios of personal income tax to GDP were higher in all the high-tax countries except Uruguay. Personal incentives are of course particularly affected by high marginal rates. But because of a variety of allowances and the variable incidence of income tax in most systems, the only macroeconomic indicator available on the effective burden of this tax is the average ratio. This is still a useful measure of the magnitude of this particular tax "wedge." An econometric study conducted by Martin Beenstock (1979) in the United Kingdom found that taxation also affects the demand for labor by firms. He estimates that a 1 percent rise in employment surcharges (such as Selective Employment Taxes and national insurance) eventually has the effect of reducing employment by about 1.4 percent. D. Innovation Several studies have shown that a substantial proportion of economic growth can be attributed to "technical change," in addition to the contributions of capital and labor inputs. Technical change encompasses improvements in technology and managerial techniques and product innovations. Dale Jorgenson (1981) estimates that out of an average annual growth of US output of 3.5 percent between 1948 and 1976, technical change - 27 - accounted for 1.14 percentage points compared with 1.61 percentage points by capital inputs and 0.75 percentage points by labor inputs. The rate of technical change fluctuated considerably during this period however and Jorgenson found that "the pattern of increases and decreases in the aggregate rate of technical change ... is inversely correlated with changes in the price-effective rate of taxation on capital. High effective rates of taxation are associated with low rates of technical change, while low effective tax rates are associated with high rates of technical change." Lower corporate and personal income taxes provide entrepreneurs with the resources and stimulus to launch new firms and new products and to introduce or develop new technology. In the Republic of Korea, for example, the number of manufacturing establishments rose by 76 percent between 1958 and 1975 and their total employment increased fivefold. This period witnessed a substantial broadening and deepening of the industrial structure. Peter Heller (1981) has shown that, even assuming that none of the incidence of corporation tax is shifted to workers or consumers, the effective burden of direct taxes on the top three income deciles (from which most entrepreneurs are drawn) was only 1.8 percent, 3.6 percent, and 11.7 percent of their total incomes in 1976. Exemptions from indirect taxes and tariffs for exporters also played a critical role in the diversification of the Korean economy. Licensed exporters could also deduct a reserve fund from their taxable income for the development of new foreign markets. Further incentives encouraging innovation in Korea include tax-exemption of royalty payments under technical agreements for a period of five years, an additional 50 percent depreciat-ion allowance for research facilities and a tax credit of 8 percent for investment in - 28 - buildings and training facilities for technical development. This credit is increased to 10 percent if locally made machinery and equipment is used in these facilities. Of course, cause and effect relationships may run in both directions. If a rapid growth momentum is established in response to fiscal and other incentives, incomes rise and new opportunities are created in the domestic market, thus stimulating further growth of output. This, in turn, brings in higher tax revenues and allows government to expand its public services and investment while maintaining tax rates and ratios at relatively low levels. 0 A rapidly expanding domestic engineering (machine building) industry has provided a strong impetus to technological innovation in countries such as Brazil, Japan, Republic of Korea, and Singapore. This has been encouraged further by favorable tax provisions for this industry. In other countries, however, the emergence of an indigenous capacity for technological development has been held back by the granting of import duty exemptions or rebates to purchasers of imported machinery in other sectors. With overvalued currencies, this has resulted in negative protection for domestic machinery producers and undue dependence on foreign technology, which is often poorly adapted to the needs and factor endowment of the host country. This tendency has been reinforced by cascading sales taxes which penalize subcontracting relationships between independent, specialist producers of engineering components and the machine assemblers. Subcontracting has been a prominent feature of Japanese industrial development. Large-scale, vertically integrated engineering firms, specialized by finished product rather than by process, are a less viable alternative in small, lower income countries. - 29 - As Carl Shoup (1981) has stressed, calculations of the net tax burden on a given sector must take into account the ways tax revenue is used. Industry may have benefited in some countries by government-funded research and training programs. But in-house research and in-plant training seem to have been generally more cost-effective than similar activities undertaken by government institutions. The latter tend to be too remote from practical realities of production and marketing. Nestor Terleckyj (1974), using a sample of thirty three industries in the US, found a strong direct effect of privately financed research and development (R&D) on growth of total factor productivity, but no discernible effect by government financed R&D. The contribution of firm-financed R&D to growth of productivity was calculated-to be about 0.36 percent. D.C. Mueller (1967) has shown that R&D expenditures are affected by corporate liquidity, which is partly determined by tax incentives available to the firm. Furthermore, since much innovation is embodied in new capital equipment, measures that stimulate investment speed the rate at which the benefits of innovation spread throughout the economy. V. CONCLUSIONS The evidence summarized in the preceding pages suggests that tax policy has affected economic performance via two basic mechanisms. First, lower taxes have resulted in higher real (after tax) returns to savings, investment, work and innovation. Higher returns have stimulated a larger aggregate supply of these factors of production and thus raised total output. Second, the focus and types of fiscal incentives provided by low-tax countries appear to have shifted resources from less productive to - 30 - more productive sectors and activities, thus increasing the overall efficiency of resource utilization. The reverse seems to be true for some high-tax countries. Statistically significant negative relationships between taxes and GDP growth, and critical growth determinants (investment, labor supply, labor productivity and exports) were found in our sample of countries. Overall, an increase of 1 percentage point in the total tax/GDP ratio is estimated to decrease the rate of economic growth by 0.36 percentage points. The response seems to be greater in low-income societies, perhaps because they offer wider scope for productivity gains from the spread of modern technology, improvement in skills and intersectoral transfer of labor. Structural and institutional rigidities and higher existing levels of technology and productivity in industrial economies may limit their potential for tax-induced gains. A different sample, drawn from countries in the medium tax ranges, might yield lower coefficients. But it is unlikely that their sign would change, as several independent studies point in the same direction. The impact on government revenue is also important. Expansion of the tax base allowed low-tax, high growth countries to increase expenditure on government services rapidly. Social indicators for life expectancy and income distribution suggest that the poor shared in the benefits of more rapid growth. It is possible that low-tax countries, being less interventionist generally, devote a higher proportion of their revenue to essential public goods and to services which enhance efficiency as well as welfare. Balassa (1982) has shown that African countries he classifies as "interventionist" experienced significantly higher incremental - 31 - capital-output ratios and lower growth rates than did "market-oriented" African countries during the period 1963-79. The findings do not imply that tax changes would bring immediate results. The timing and context of tax reform is probably critical. Recent experience in the industrial countries indicates that tax cuts may not stimulate output sufficiently while deflationary monetary policies and overvalued exchange rates are pulling strongly in the opposite direction; or when extensive government borrowing to meet large budgetary deficits "crowds-out" private sector investment by raising real interest rates. Nor does a global recession provide the most propitious occasion for tax policy initiatives. Even in more favorable circumstances, the responses of investors, workers, entrepreneurs, and consumers may take years to take full effect. The gestation period for investment is long but the evidence cited suggests that long-term benefits will accrue. No inferences can be drawn about the short-term effects of tax changes in any particular country. It is doubtful if tax cuts could ever serve as a "quick fix" for a sick economy. A more pragmatic approach for high-tax, low growth countries might be to seek progressive improvements in the "quality" of the tax structure. Fiscal incentives may generate faster growth and increased revenues in the long run if they are focused on areas with high incremental income yields (such as exports). Further study of many aspects of tax/growth relationships should be rewarding. But, at least, these preliminary findings indicate that lower taxes are compatible with a pattern of development that raises output and reduces poverty significantly. - 32 - REFERENCES Carlos A. Aguirre, Peter S. Griffith, and M. Yucelik, Tax Policy and Administration in Sub-Saharan Africa (International Monetary Fund, March 1981). Bela Balassa, "Exports and Economic Growth: Further Evidence," Journal of Development Economics, vol. 5 (1978), pp. 181-89. Bela Balassa, "Adjustment Policies and Development Strategies in Sub- Saharan Africa, 1973-78" (World Bank, Development Research Department Discussion Paper No. DRD41, November, 1982). Michael Beenstock, "Taxation and Incentives in the U.K., "Lloyds Bank Review, October 1979, Number 134, pp. 1-15. Michael R. Darby, The Effects of Social Security on Income and the Capital Stock (American Enterprise Institute Studies in Social Security and Retirement Policy, 1979). Otto Eckstein, Tax Policy and Core Inflation, A Study Prepared for the Use of the Joint Economic Committee, Congress of the United States (Washington, Government Printing Office, 1980). Martin Feldstein, "Social Security, Induced Retirement and Agregate Capital Accumulation," Journal of Political Economy, vol. 82 (September/October 1974) pp. 905-26. Martin Feldstein, "Inflation, Tax Rules and the Accumulation of Residential and Non-residential Capital" (Seminar Paper No. 186, Institute for International Economic Studies, University of Stockholm, November 1981). - 33 - Martin Feldstein, "Inflation, Tax Rules and Investment: Some Econometric Evidence, "Econometrica, vol. 50, No. 4, July 1982. Martin Feldstein and George Fane, "Taxes, Corporate Dividend Policy and Personal Savings: The British Postwar Experience," Review of Economics and Statistics, 1973. Malcolm Gillis, "Evolution of Natural Resource Taxation in Developing Countries," (Development Discussion Paper No.126, Harvard Institute for International Development, December 1981). Richard Goode, The Individual Income Tax, (Washington, Brookings Institute 1976). Roger H. Gordon and Dale Jorgenson, "The Investment Tax Credit and Countercylical Policy," (Cambridge, Massachusetts, Harvard Institute of Economic Research Discussion Paper No. 373, June 1974). L. Godfrey, Theoretical and Empirical Aspects of the Effects of Taxation on the Supply of Labour, (Paris, Organization for Economic Co-operation and Development, 1975). Peter S. Heller, "Testing the Impact of Value-Added and Global Income Tax Returns on Korean Tax Incidence in 1976: An Input-Output and Sensitivity Analysis," IMF Staff Papers, June 1981, Vol. 28, No.2, pp. 375-410. Dale W. Jorgenson, "Taxation and Technical Change," in Ralph Landau and N. Bruce Hannay. edits., Taxation, Technology and the U.S. Economy (New York, Pergamon Press, 1981). Donald B. Keesing, "Trade Policy for Developing Countries" (World Bank Staff Working Paper No. 353, August 1979). - 34 - Assar Lindbeck, "Budget Expansion and Cost Inflation" (paper presented to the American Economic Association Meeting, New York, December 1982). D.C. Mueller, "The Firm Decision Process: An Econometric Investigation," Quarterly Journal of Economics, February 1967. James M. Poturba and Lawrence H. Summers, "Dividend Taxes, Corporate Investment and "Q," (National Bureau of Economic Research, Working Paper No.829, December 1981). George Psacharopoulos, "Returns on Education: An Updated International Comparison," in Timothy King (edit.), "Education and Income" (World Bank Staff Working Paper No. 402, July 1980). Keith Marsden, Trade and Employment Policies for Industrial Development (Washington, World Bank, 1982). Carl S. Shoup, "Economic Limits to Taxation," Atlantic Economic Journal, Volume IX, Number 1, March 1981, pp. 9-23. Vito Tanzi, Taxation and Price Stabilization (International Monetary Fund, October 1981). Vito Tanzi, Taxation in Sub-Saharan Africa: A Statistical Evaluation (Washington, IMF, October 1981). Nestor Terleckyj, The Effects of R&D on Productivity Growth of Industries: An Exploratory Study (Washington D.C. National Planning Association, 1974). Lester C. Thurow, The Zero-Sum Society: Distribution and the Possibilities for Economic Change (New York, Basic Books, 1980). William G. Tyler, "Growth and Export Expansion in Developing Countries: Some Empirical Evidence," Journal of Development Economics, vol. 9 (August 1981), pp. 121-30. Worid Bank Aggregate Demand and Capital Market Imperfec- Macroeconomic Imbalances tions and Economic Publications in ThaiFland: Simulations Development of Related with the SIAN 1 Model Vinayak V. Bhatt and Wafik Grais Alan R. Roe Interest Focuses on the demand-side adjust- World Bank Staff Working Paper ments of the Thai economy to lower No. 338. July 1979. 87 pages agricultural growth and to higher (including footnotes). energy prices. Discusses policy measures and structural changes that Stock No. WP-0338. $3.00. might enable the economy to over- come these problems and continue to maintain high GDP rates of growth. The Changing Nature of World Bank Staff Working Paper No. Empliain ortiac adevelpin 448. April 1981. 70 pages (including Implications for Developing 2 appendixes).Conre Stock No. WP-0448. $3.00. Albert C. Cizauskas World Bank Staff Working Paper No. 409. July 1980. 43 pages (including An Analysis of 3 annexes). Developing Country Stock No. WP-0409. $3.00. Adjustment Experience and Adjustment Experiences In Growth Prospects of the the 1970s: Low-Income Asia Semi-Industrial Countries Christine Wallich Compounding and Dls- Frederick Jaspersen This background study for World counting Tables for This background study for World Development Report 1981 examines Project Evaluation Development Report 1981 examines low-income South Asias adjustment J. Price Gittinger, editor the successful process of adJustment to the external shocks of the 1970s, Easily comprehensible, convenient to extemal "shocks" of the 1970s especially those factors that helped tables for project preparation and (rising prices of oil Imports, reduced make the effects of these external demand for exports, slower economic developments less severe in the analysis. growth in the OECD countries) in the region than in other parts of the The Johns tlopkins University Press, semi-industrial developing countries. developing world. 1973; 7th printing, 1982. 143 pages. Presents an analytical framework for World Bank Staff Working Paper No. LC 75-186503. ISBN 0-8018-1604-1, quantifying the effects of demand 487. August 1981. lu + 39 pages $6.00 paperback. management and structural adilust- (including references). ment in forty-two countries, with par- Arabic: World Bank, 1973. (Available ticular reference to Uruguay, Brazil, Stock No. WP-0487. $3.00. from ILS, 1715 Connecticut Avenue, Republic of Korea, and Turkey. N.W., Washington, D.C. 20009, U.SA.) World Bank Staff Working Paper No. Aspects of Development $4.00 paperback. 477. August 1981. 132 pages (including Bank Management French: Tables dinterets composes et 3 appendixes). William Diamond and d'actualisation. Economica, 4th print- Stock No. WP-0477. $5.00. V. S. Raghavan ing, 1979. Deals exclusively with the manage- ISBN 2- 7178-0205-3, 36 francs. Adjustment in ment of development banks. The Spanish: Tablas de interes compuesto y Low-income Africa book Is divided into eight sections, -de descuento para evaluaci6n de proyec- Robert Liebenthal each dealing with one aspect of de ditoria enos o de print- This background study for World management of its problems, and tos. EditorialTec0os,973 thprint- Develpmen Repot 191 anayzes of the various ways of dealing ig 90 Dhevelopsment Roepote1m1aalyzeocs with them. ISBN 84-309-0716-5, 380 pesetas. during the 1970s made by a group EDI Series in Economic Development. of middle-income and low-income The Johns Hopkins University Press, A Conceptual Approach to African countries, with particular 1982. 311 pages. the Analysis of External Debt reference to Kenya, Tanzania, of the Developing Countries Senegal, and Sudan. LC 81-48174. ISBN 0-8018-2571-7, Roferthe . DevloingContie $29.95 hardcover; ISBN 0-8018-2572-5, Robert Z. Alber World Bank Staff Working Paper No. $12.95 paperback. World Bank Staff Working Paper No. (including bibiographya. 421. October 1980. 25 pages (including (including bibliography). ~~~~~~~~~~appendix, references). Stock No. WP-0486. $3.00. nd. Weer42s. Stock Nlo. WP-0421. $3.00. )evelopment Banks Developments in and Food Policy Issues in Villiam Diamond Prospects for the External Low-income Countries )perating experiences that serve as a Debt of the Developing Edward Clay and others practical guide for developing coun- Countries: 1970-80 A background study for World ries, with a selected list and and Beyond Development Report 1981. Discusses ,ummary description of some Nicholas C. Hope food distribution-especially its levelopment banks. This baro td for World insecurity in the face of external 'he Johns Hopkins University Press, Development Report 1981 analyzes economic pressures and potential 957; 5th printing, 1969.141 pages the debt situation and its implica- concerns-in general and with including 2 appendixes, index). tions for future borrowing. reference to Bangladesh, Zambia, C 57-13429. ISBN 0-8018-0708-5, World Bank Staff Working Paper No. and India. 5.00 (£3.50) paperback. 488. August 1981. 70 pages (including World Bank Staff Working Paper No. 2 annexes, references). 473. August 1981. vii + U5 pages. )evelopment Finance Com- Stock No. WP-0488. $3.00. Stock No. WP-0473. $5.00. zanies: Aspects of Policy md Operation Energy Prices, Substitution, A General Equilibrium Villiam Diamond, editor; and Optimal Borrowing in Analysis of Foreign ossays by E. T. Kuiper, the Short Run: An Analysis Exchange Shortages in a )ouglas Gustafson, and of Adjustment in Oil- Developing Economy . M. 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AVasigtble fre frmt.) ordBak strategies that can be expected in the World Bank Staff Working Paper No. Vashington, D.C.) ~~future and the demands that will be 4..Jnay18..2pgs(nld 'panish: Las compa*ifas financieras made on multilateral Institutions. ing r ences). le desarrollo: algunos aspectos de su Ing references). xolftlca y de sus actividades. Editorial World Bank Staff Working Paper No. Stock No. WP-0443. $3.00. ecnos, 1969. 466. July 1981. 77 pages (including 500 pesetas. footnotes, references). Stock No. WP-0466. $3.00. NEW Development Prospects Df Capital Surplus Oi- Exchange Rate Adjustment Growth and Structural Exporting Countries: Iraq, under Generalized Currency Adjustment in East Asia Kuwait, Libya, Qatar, Floating: Comparative Parvez Hasan Saudi Arabia, UAE Analysis among Developing Analyzes the economic performance Rudolf Habliltzel Countries of the flve large market economies of Rudolf HRablutzel CountriesEastAsia-Korea, Thailand, the rhis background study for World Romeo M. iautista Philippines, Malaysia, and Development Report 1981 Examines the experiences of twenty- Indonesia-during the last two Jiscusses the production strategies two developing countries in adapting decades; focuses on the key factors and the development policies of the to the generalized floating of the explaining their remarkable economic Zapital-surplus oil-exporting world's major currencies since 1973 and social progress; and identifies the -ountries. and discusses the Implications that main economic issues for the 1980s. World Bank Staff Working Paper No. currency floating has on policymaking World Bank Staff Working Paper No. ;83. August 1981. 53 pages (Including In these countries and indicates direc- 529. 1982. 42 pages. tions for further research. ;tatistlcal tables). World Bank Staff Working Paper No. ISBN 0-8213-0102-0. $3.00. 5tock No. WP-0483. $3.00. 436. October 1980. 99 pages (including appendix). Stock No. WP-0436. $3.00. lntenational Adjustment In Motes on the Mechancs of ect appraisal. To give substance to the 196os Oirowtb sand Debt the applied and policy dimensions. Johe i Benjamin B. l0Inf many of the readings are drawn from VUay Joshl Bergamin B. King the experience of development prac- A backgound study for World A practical model to explore the way Utloners and relate to such Important Deuelopment Report 198L Analyzes In which capital Inflow from abroad sectors as agriculture. Industry, the macroeconomics of International affects economic growth. power. urban services, foreign trade. adJustment. Highlights potential The Johns e opkins University PWss and employment. The principles market failures and areas for opnsnieitA' outlined are therefore relevant to a Interventon. 1968. 69 pages (Including 4 annexes). host of development problems. World Bank Staff Working Paper No. LC 68-8701. 15BN 0-8018-0338-1, $5.00 The Johns Hopkins University Press. 485. A ugust 1982. 57 pages. (f3.00) paperback. February 1983. About 304 pages. 15BN 0-8213-0062-8. $3.00. LC 82-7716. ISB1 0-8018-2803-1, The PoiDcy Experience of $35.00 hardcover; ISBN 0-8018-2804-X, Twelve Less Develope-d $12.95 paperback. * zw Countries, 1973-1978 Bela Balassa Priate Bank Lending to The Mature of Credit Uses the methodology applied In the Developing Counties Markets In Developing author' *The Mlewly Industrializing Richard O'Brien Countries: A Framework Developing Countries after the Oil for Policy Anabls Crisis" (World Bank Staff Working A background study for Wbrld Arvind Vi~nlan Paper Mo. 473, October 1980) to Development Report 1981. examine the policy experience of Descrbes the evolution of relation- The central purpose of the paper is to twelve less developed countries In ships between private banks and analyze various fonns of govemrnment the period following the quadrupling developing countries. Interventdon In the loan market In of oil prices In 1975-74 and the Worid Bank Staff Working Paper (1o. terms of their effect on efficlency. world recession of 1974-75. 482. August 1981. ui + 54 pages World Bank Staff Working Paper (No. World Bank Staff Working Paper (1o. (including appendix. bibliography). 524.1982. 204 pages. 449. April 1981. 36 pages (including Stock No. WP-0482. $3.00. ISBtl 0-8213-0019-9. $5.00. appendix). Stock (10. WP-0449. $3.00. Private Capital Flows to The Rewly IndtrIalizing Developing Countries and Developing Countries afte The Polttical Structure of Their Determinlations: the 0i Crisis the New Protectionism Ilntorical Perspective, Bela Balassa Douglas R. Nelson Recent Experience, and World Bank Staff Working Paper IYo. This background study for World Future Prospects 437. October 1980. 57 pages (including Development Report 1981 Alex Fleming appendix). presents a polItIcal-economIc bakonstdfrWrl analysis of what has been called the A backgound study for World Stock No. WP-0437. $3.00. 'new protectionism:' Development Report 1981 Discusses the nature and determina- World Bank Staff Working Paper (1o. don of recent private capital flows to Notes on the Analsi of 471. July 1981. 57 pages (including developing countries. Focuses on Capital Flows to Developing references). those flows passing through the Nations and the Stock No. WP,,,7. .00 AAinternadonal banks and examines the lations and the Stock ,,o. WP-0 71. $3.00. prospects for and constraints on mRecyclng" Problem developing countries' contnuing Ralph C. Bryant access to the International capital A backgound study for Wordl IMEW markets. Development Report 196L World Bank Staff Working Paper Ho. Summarizes and criticizes the con- Prcing Policy for Develop 484. August 1981. 41 pages. ventional analysis of the Interrela- ment Management Stock Ho WP-0484 $3.0 dons between flnancial markets In Gerald M. Meier ° the industrialized countries and capi- tal flows to the developing nations. Preupposing no formnal training In economics, It explains the essential Private Direct Foreign World Bank Staff Working Paper No. elements of a price system, the Investment in Developiig 476. August 1981. 67 pages. functions of prices, the various Stock Ho. WP-04 76. $3.00. policies that a government might Counbiles Stock o. WP-4 76. 3.00.pursue In cases of market failure, K. Blllerbeck and Y. Yasugi and the principles of public pricing of World Bank Staff Working Paper No. goods and services provided by 348. July 1979. iv + 97 pages (includ- governiment enterprises. It also pro- n nee) vides the would-be practitioner with g anneres). an appreciation of the underlying Stock No. WP-0348. $5.00. logical structure of cost-benefit proj. NEW StUctual Adjustment Implications In terms of Income Polldes in Developing generation, external deficit, and Sbort-Run Macro-Economic Economies Inflation. Adjustment Policies In Bela Balassa World Bank Staff Working Paper No. South Kora; A Quantitatve Examines structural adUustment 513. June 1982. 93 pages (Including Analyis policies (policy responses to external appendix). Sweder van WUnbergen shocks, such as the quadrupling of ISBN 0-8215.0023-7. $3.00. oil prices and the world recession of An analysis of the startlIng reversal of the 1970s) of developing countries. performance of lhe South Korean Considers reforms In production World Debt Tables economy In 1979 and 1980 compared incentives, Incentives to save and to A compilation of data on the external with the preceding fifteen yeams and invesmp publncoinvestmentthesecteral an exploration of the short-run policies, and monetary policies, and publc and pubicly-uaranteed debt macro-economic policy options comments on the Interdependence of of 101 developing countries plus available to Korea In 1981. Highlights the various policy measures and on eighteen additional tables of private the role of commercial banks, foreign the International environment In and nonguaranteed debt from the capital Inflows, and money markets which tiey operate. World Bank Debtor Reporting and the use of credit obtained from System. Describes the nature, con- these sources to finance fixed and World Bank Staff Working Paper No. tent, and coverage of the data; working capital. 464. July 1981.536 pages. reviews the external debt of 101 countries through 198L contains World Bank Staff Working Paper No. Stock No. WP-0464. $3.00. tables on external public debt out- 510. Nouember 1981. lu + 178 pages standing commitments, disburse- (Including 3 appendixes). ments, service payments, and net ISBN 0-8215-0000-8. $5.00. nEW borrowings of 101 developing coun- tries, by country, 1972-1981. Structunl Aspects of (EC-167/81). December 1982. Annual. NEW Turkish Inflation: About 300 pages. 1950-1979 ISSN 0253-2859. $75.00. State Finances in India M. Atarnan Aksoy Computer tapes containing the data A three-volume set of papers that Inflation has been one of the maJor bases for the World Debt Tables are explores a range of issues relating to problems of the Turkish economy available from the Publications the nature of Intergovernmental fiscal during the postwar period. This paper Distributon Unit. World Bank. The relations In India. develops alternative Inflation models tapes are available to international and analyzes their performiance In agencies and official nonproflt agen- light of the Turkish experience In cies of member govemments at a VoL 1:- Rfenuc SharlW order to provide a framework on nominal fee. For Information concem- In India which a more tealistic macro model Ing fees for other organizations, Christine Wallich can be developed. please write to the addressee listed Deals speciflcally with the principles World Bank Staff Working Paper No. above. of revenue sharing In India. 540.1982. 178 pages. Supplements to World Debt Tables are ISBN 0-8213-0098-9. $5.00. Issued periodically as information VoL 11: India-Studies in becomes available; the current StatC _nanc_ _ updates are Included with orders for Christine Wallich rMw World Debt Tables. Examines In detail the Implications of revenue sharing for project finance. Thailand: An Analsis of T p Structural and 4ion The lIpCto ContactualSaiso Structural and Mon- ~ Resource MobIlization and Allocation: VOL 111: The Measurement of Structural Adjustments The x of Malaysi& Tax Effort of State iovern- Arne Drudc Waflk Grals, and Sodi Securty Funds in Sln9spore mnnts, 1973-1976 Dusan Vujovic and te Pippines Ramications of Raja J. Chelliah and This study was prepared as a I-s t i1 Narain Sinha * background paper for the preparation 5tI1It8s Of Sodal security runds of a tructral-aUustmnt lon to In India and Sri Lanka: Legislation Attempts to evaluate the tax perfor- of a structural-adJustment loan to a esqwenh mance of particular states In terms of Thailand and Is a foilow-up to a pre- Parhasathl Shome and the average tax effort of all states. vious paper entlUed "Aggregate Katrilne Anderson Salto Demand and Macroeconomic World Bank Reprint Series: Nfumber 144. World Bank Working Paper No. 523. Imbalances In Thalland. Comparatve Reprinted fhom The Malayan Economic Review, wt. September 1982. vol. 1, 85 pages, uol. II, statistics are used, within the frame- 23. no. 1 (April 1978).54- 72: Labour and Society, 186 pages, vol. III, 85 pages. work of a four-sector macroeconomic wo. 5. no. 1 (January 1980):19-30; and The Indian model, to assess alternatve ways of Joumal of Economics. wo. 60. panr 3. no. 238 ISBN o-8213-0013-X. uol. 1, $3.00, uol. 11 macroeconomic adJustment In the (January 1980).349-60. $5.00, vol. III, $3.00. Thai economy. Discusses speclflcally Stock No. RP-0144. FIe of charge. flscal policy Interventions, manipula- tions of the exchange rate, and pro- ductvity Improvements and their Policy Responses to External Shocks In Selected Latin American Countries Bela Balassa World Bank Reprint Series: 11umber 221. Reprinted from Quarterly Review of Economics and Business, vol. 21, no. 2 (Summer 1981).:131-64. Stock N1o. RP-0221. free of charge. Restructuring the World Economy: Round 11 Hollis Chenery World Bank Reprint Series: Number 204. Reprinted from Foreign Affairs (Summer 1981):1102-1120. Stock No. RP-0204. Free of charge. Risk Assessments and Risk Premiums In the Eurodollar Market Gershon Feder and Knud Ross World Bank Reprint Series: Number 220. Reprlnted from The Journal of Finance, vol. 337, no. 3 (June 1982):679-91. Stock No. RP-0220. Free of charge. WORLD BANK PUBUCATIONS ORDER FORM SEND TO: WORLD BANK PUBUCATIONS WORLD BANK PUBLICATIONS P.Q BOX 37525 or 66, AVENUE D'IENA WASHINGTON, D.C. 20013 75116 PARIS, FRANCE U.S.A. Name: Address: Stock or ISBN # Author, Title Qty. Price Total Sub-Total Cost: Postage & halndling fee for more than two free items ($1.00'each): Total copies: _ _ Air mail surcharge ($2.00 each): TOTAL PAYMENT ENCLOSED:): Make checks payable: WORLD BANK PUBLICATIONS Prepayment on orders trom individuals is requested. Purchase orders are accepted from booksellers, library suppliers, libraries, and institutions. All prices include cost of postage by the least expensive means. The prces and publication dates quoted in this Catalog are subject to change without notice. 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