to GDP approach a healthy 15-20 percent range. In order to evaluate the efficiency of the VAT system, the paper examines the VAT revenue productivity ratio.* This ratio contains information on both the coverage of the VAT and the efficacy of the tax administration to prevent evasion. Especially since 1990, this productivity rate has improved in most countries in the region, and particularly in Argentina, Bolivia, Costa Rica, Paraguay, and Peru. For most countries, however, there is still much room for further progress. Only a few countries -- Brazil, Chile, Bolivia, Paraguay, El Salvador, and Guatemala -- have achieved moderate VAT productivity rates between 40 percent and 50 percent in contrast to the rates for OECD countries, which are normally between 50 percent and 70 percent.” (4) The fourth area of structural reform deals with governance and public institutional reform. \n this area progress has been more modest and less widespread that in the previous three reform areas prevously mentioned. The approach taken in this paper to assess progress in governance has been to rely on subjective indicators provided by two independent international country risk evaluators. They are International Country Risk Guide (ICRG) and Business Environment Risk Intelligence (BERI). These sources provide information related to two aspects of good governance. The first is the quality of public institutions (evaluated by the variables “corruption in government” and “quality of the bureaucracy”), which describes the ability of the state to implement its policies through an appropriate structure ofgovernment and through honest and technically competent bureaucrats. The second is the quality of public services (evaluated by the variables “rule of law’, “enforceability of contracts”, and “expropriation risk”), which determine an environment where contractual obligations are respected by both the state and private agents, where legal disputes are effectively resolved in the judicial system, and where legal rules for investment, employment, and taxation are not arbitrarily modified by the state.

The assessment of progress in these aspects of governance differs somewhat among risk evaluators. Whereas BERI drawsa picture of limited progress except for a handful of countries -- Argentina, Chile, Ecuador and Peru --, ICRG provides an optimistic appraisal of progress throughout the region. Although both suggest that there has been general improvement, a closer examination of the underlying indicators of the ICRG governance index reveals that by 1995 Latin America’s standards of governance remained well below that of the Asian NICs and the OECD countries. This gap is particularly large in the area of the rule of law (judicial and police systems) and in the quality of the public administration (technical competence and honesty of the bureaucracy, as well as procedural clarity). The difference between Latin America and the Asian NICs and OECD countries is smaller regarding respect of property rights, including the risk of nationalization of enterprise equity.

(5) | The area where the least progress has been made is labor market reform. Except for Chile and the English-speaking Caribbean countries, most countries in the region had rather rigid and distorted labor markets in the 1980s and early 1990s; excluding a few notable cases of labor market reform, the situation in the region by 1995 remained basically the same. The main factors

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* The VAT revenue productivity ratio is defined as VAT revenue over GDP divided by average VAT rate.

> 100 percent would imply a VAT without exceptions and full enforcement.

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