metadata: authors: 0: author: Skinner, Jonathon
count: Africa
docna: 0: docna: Taxation and output growth in Africa
docty: Policy Research Working Paper
subtopic: Tax Administration,Macro-Fiscal Policy,Taxation & Subsidies,Economic Adjustment and Lending,Tax Law,Construction Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Labor Markets,Public Sector Economics,Tax Policy,International Trade and Trade Rules,Business Cycles and Stabilization Policies,Public Finance Decentralization and
            Poverty Reduction
teratopic: Poverty Reduction
abstracts: cdata!: This paper presents a framework for
            measuring how the structure of taxation and government
            spending affect output growth. It is shown that when
            countries are not following a steady-state growth path,
            static and dynamic distortions will affect output growth. In
            particular, taxes can affect output by; (1) reducing the
            marginal productivity of capital and labour, and (2)
            reducing the supply of capital and labour. The paper
            indicates that differences in tax policy can explain a
            substantial degree of variation in output growth among
            African countries. While measurement error and the potential
            for excluded variables suggest that the regression results
            be interpreted cautiously, the results imply that the
            structure, and not simply the level, of taxation can play an
            important role for encouraging growth in developing countries.
repnme: repnme: Taxation and output growth in Africa
display_title: Taxation and output growth in Africa
listing_relative_url: /research/1988/08/700673/taxation-output-growth-africa
topicv3: Manufacturing Sectors m1326521 1281,Trade m1326924 698,Taxation m1327615 1121,Tax Policy m1327616 983,Labor Supply m1504055 2751
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Poverty Reduction
origu: Policy Plan & Prog Review Dept
no_of_pages: 53
model_extractions: # Pl Planning, and Rn_sch

# Public Economics

Can tax policies be designed to encourage economic growth in developing countries? One view holds that by providing the govemment with a stable source of funding and reducing the current account deficit, tax revenues encourage long-term growth. In this view, the economic distortions aggravated by tax rates are slight in comparison to such institutional constraints as price controls, foreign exchange allocations, and trade quotas.

The other view is that high marginal tax rates constrain long-temi economic development by discouraging business expansion, investment, and foreign trade. The contention is that the benefits of a carefully designed, moderate tax structure exceed the costs of budget deficits or spending cuts.

This paper tests these v:.ews by measuring the effect of government spending and taxation on output growth. In theory, higher tax rates shift investment and employment to sectors with low - or even negative - tax rates, such as import-substitution or underground sectors. The lower returns to investment and labor in these sectors mean that the economy wiU generally record lower growth rates.

Data from 31 African countries show the medium- and long-term effects of fiscal policies on growth during 1965-73 and 1974-82. Govemment investments for the earlier period were sufficiently productive to justify the distortions imposed by the relatively high tax rates necessary to finance them. By 1974-82, however, the return on govenmment investments had fallen to almost zero, suggesting that the burden of personal and corporate taxes led to a contraction in growth. Although taxes on imports did not affect out-ut directly, such taxes reduce investment and thereby indirectly curtail grwth. On balance, sales and excise taxes had the most moderate effects on growth and investment.

In sum, a balanced increase in govenmment spending financed by sales and excise taxes, or by a shift from personal and corporate taxes to consumption taxes, can increase growth rates.

This paper is a product of the Public Economics Division, Country Economics Department. Copies are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Ann Bhalla, room N10077, extension 60359.

'Me PPR Working Paper Series dissenitnates thie fdings of work under way in the Banees Policy, Plawnngk and Reseach Complex. An objective of the series is to get thiese findings out quickly, even if presentations are less than fully polished.| The findings, interpretations, and conclusions in these papers do not necessarily Tepresent official policy of the Bank.l

Copyright 0 1988 by the Inwteraonal Bank for Reconstruction and Development[Me World Bank
# Taxation and Output Growth in Africa

## by Jonathan Skinner *

### Table of Contents

|I. Introduction ........................................|1|
|---|---|
|II. Theoretical Model .................................|4|
|III. Empirical Implementation of the Theoretical Model.|17|
|IV. Empirical Results .................................|21|
|V. Conclusion .........................................|29|
|Tables ................................................|32|
|Bibliography ..........................................|35|
|Appendix:<br>The Theoretical Model<br>.<br>.|38|

* University of Virginia and NBER. This research was funded by the World Bank. My greatest debt is to Zmarak Shalizi for illuminating discussiona which led to this paper. Christophe Chamley, Jonathan Eaton, Maxim Engers, Lvn Squire, John Strauss, and workshop participants at the Country Policy Department, World Bank, provided valuable comments and suggestions, while Jaber Ehdaie offered excellent research assistance. Any opinions expressed are those of the author, and not of the World Bank or the National Bureau of Economic Research.
# I. Introducti2r

What is the appropriate role of tax policy for encouraging economic growth in developing countries? One view is thit tax hikes reduce current account deficits and ease budgetary pressures, thereby encouraging investment and long-term growth. In this view, it is less important whether trade, personal, or excise taxes are used to raise revenue, since the effect of tax-induced distortions are thought to be small relative to institutional constraints such as price controls, foreign exchange allocations, and trade quotas.

An opposing view is that high marginal tax rates discourage work effort, squelch new investment, limit foreign trade, and thereby present a major hurdle to economic development. The long-run benefits of low rates, or at least a carefully designed tax structure, are thought to offset the disadvantage of temporary budget deficits (or expenditure cutbacks), and to provide the developing country with the necessary and perhaps sufficient environment to stimulate economic growth.

This paper tests these competing hypotheses in a model that measures the effect of taxation and government expenditures on output growth. Previous studies have developed, and estimated, models of output growth and government expenditure alone (Ram, 1986), or calculated the impact of tax distortions in general equilibrium models (deMelo, 1978; Taylor and Black, 1974; Clarete and Whalley, 1987; Henderson, 1982). The model presented below provides an integrated framework in which the impact on GDP growth rates of government expenditures, public and private capital accumulation, and sectoral tax distortions are derived in a theoretical
2model, and estimated using pooled cross-section time-series data for subSahara Africa during 1965-82.

Any study which attempts to relate government fiscal policies with output growth rates must confront the theoretical problem that while taxes and an inefficient government sector may reduce the level of GDP, it i. not clear that the rate of growth of GDP should be affected. Lucas (1985), and Manas-Anton (1985) have emphasized that taxation and (most) government policy will have no effect on long-term growth rates. The first question to be addressed, then, is why should tax rates affect output growth rates?

The answer is that static tax distortions do affect output growth along a transition pa.. -- or a sequenced change in the level of output -- by encouraging the flow of investment and labor se into sectors which largely escape taxation. The expansion of these liv&.-Iy taxed (or even subsidized) sectors will lead to lower overall capital and labor productivity. Hence for a given rate of investment and ]4bor supply grow..h, output growth is likely to decline. Alternatively, if the lightlytaxed sectors provide positive benefits (e.g., export-ori.ented industries), then taxes which direct more resources into these socially productive activities can augment output growtn rates. If the economy is on a steadystate growth path, taxation will have no effect. Ultimately, the effect of taxation on output growth is an empirical question.

While Landau (1983, 1986) has found an often negative impact of the level of government spending on growth rates, Ram (1986) has emphasized that the change in government spending is the theoretically correct factor in explaining a change in output. Regressions which follow Ram's formulation indicate that during the period 1965-73, the high
-3-

marginal return from government investment more than offset the distortionary costs of taxation. During the sharp economic downturns of 1974-82, however, the regression coefficients suggest that public investment did not contribute to GDP growth; a tax-financed increase in government investment equal to 5 percent of GDP is predicted to have reduced output growth by nearly 0.6 percentage points. The productivity of private investment remained relatively constant during both periods.

The average increase in tax effort by the Sub-saharan African countries between 1965-73 and 1974-82 is predicted to have reduced output growth, even after accounting for the positive effects of the additional government spending. However, this is not to suggest that all tax instruments are equally inefficient. Personal and corporate tax rates, for example, are estimated to have a significant and negative direct effect on -- output growth. Trade taxes have little direct effect on output growth holding private investment constant -- but they are predicted to reduce investment and thereby indirectly attenuate output growth rates. Finally, sales and excise taxes did not have a significant impact on output growth or investment. These results have two implications. The first is that government expenditures financed by sales or excise taxation can have a positive effect on output growth. The second is that a revenue-neutral shift from trade and direct taxes to sales or excise taxation may increase output growth rates.<sup>1</sup> The traditional view of direct versus indirect taxation is that direct taxes creates dynamic distortions by reducing savings and investment, while indirect taxation leads to static distortions. The results presented below suggest a different view. Direct taxes are j/ This model cannot assess the distributional impact of such a tax change.
-4

estimated to cause a "static" distortion, while trade taxes are predicted to reduce investment. These results can be explained in part by noting that developing countries often concentrate direct taxation on a very limited number of large-"'ale firms (such as those in manufacturing and mining); if in turn these taxes are passed along to the output price (as suggested by Brent, 1985), the direct tax could resemble a "static" excise tax. Similarly, companies may be discouraged from investing because of heavy export taxes on processed outputs, or the taxation of intermediate imports.

The remainder of the paper is organized in the following way. Section II discusses previous studies of tax distortions, shortcomings of cross-country regression models, and the econometric growth model. Section III presents the regression results, while Section IV concludes. An appendix is also provided which discusses aspects of the theoretical model in more detail.

# II. The Thooretical Model

It is useful to review three approaches to the issue of how tax policy affects output growth. The first Adopts a neoclassical growth model, most commonly with a single good and with infinitely-lived individuals (Lucas, 1985; MAnas-Anton, 1985). In such a model, taxes have no effect on output growth in the long-run since steady-state output growth is determined by exogenous factors such as population growth and technological change.

During the transition path between the two steady-state equilibria, growth rates will be affected. Lucas (1985) suggests that "static" tax distortions might account for only 0.5 percentage point
-5-

differences in growth rates along the transition path. However, a 0.5 percentage point jump in annual growth rates would have represented a ' percent improvement over the (unweighted) average real per capita growth rates in Sub-saharan Africa during 1974-82.

There is little -P son to believe that African (or other) countries are in steady-at, equilibrium. Only 5 Sub-saharan African countries had achieved independence before 1960, and regime changes will presumably lead to differing growth paths. Furthermore, the transition path is lengthy; the "grand traverse" of tre- U.S. from a low capital intensity to a high capital intensity economy took most of the 19th century (David, 1977).2 A model which allows for the possibility of transition paths seems appropriate for the analysis of developing economies.

A second approach uses computable general equilibrium (CGE) models of specific countries to test the effect of static tariff or sectoral tax inefficiencies.3 These mddels compare the output (or income distribution) of an economy using baseline parameters with the outcome using the counterfactual alternative policy parameters. One drawback of these models is that parameters necessary for policy recommendations, such as the impact of government spending and investment on sectoral output, are not always estimable. The dynamic specification of these simulation models presents a particular problem (see Chamley, 1983).

The third approach compares tax policy and country growth rates in cross-section empirical analysis. For example, Marsden (1983) matched ten high-tax countries, such as Zambia, Britain, Chile, and Zaire, with 10 low-

- / Life cycle simulation models also suggest a trasition path in excess of 30 years (Auerbach, Kotlikoff, and Skinner, 1983; Seidman, 1984).

- .i. For example, see Henderson (1982), Taylor and Black (1974), Clarets and Whalley (1987), and DeMelo (1978) for simulation models of developing countries.
-6-

tax countries such as Singapore, Korea, Uruguay, and Japan. He found in comparing the 20 countries that higher overall tax effort led to lower output growth. Two disadvantages with this study are the lack of an underlying theoretical model, and the subjective procedure by which countries are matched together.

A number of studies have used cross-country regressions to measure the impact of government expenditures and taxation on output growth. Martin (n.d.) foun4 that while tax effort (the ratio of tax revenue to GDP) depressed output growth, deficits reduced it by even more, suggesting that tax hikes could, by cutting back deficits, encourage output growth rates.<sup>4</sup> *He also found that income/corporate and trade/indirect taxes (defined as ratios of the specific tax revenue to GDP) reduced output growth.

Koester and Kormendi (1988) calculated marginal tax rates for each of their sample of 63 countries by comparing the year-to-year fluctuation of tax revenue with the year-to-year change in GDP. The marginal tax rate (conditional on average tax effort) had little impact on growth rates in a cross-sectional analysis, but it did have a strong negative effect on the level of output.

Landau (1983,1986) performed extensive cross-country regressions to measure the impact of government expenditures, revenue, and deficits on output growth. Most components of government spending reduced GDP growth rates; in addition, Landau (1986) found evidence that taxes reduced output growth and crowded out private investment. The question remains why a

> 4/ The direction of causality between deficits and output growth is problematic. Countries often run deficits during economic downturns and surpluses during economic booms. In this view, low GDP growth rates cause deficits, and not conversely.
-7-

large and inefficient government sector should<sup>necessarily affect the</sup> growth rate, rathar than simply the level, of GDP?

To address this theoretical difficulty, Ram (1986) derived<sup>an</sup> expression for output growth as a function of growth rates<sup>in government</sup> spending. He found a strong, positive impact of<sup>government current</sup> consumption on output growth. The goal of this section<sup>is to build on work</sup> by Robinson (1971), Feder (1983), and Ram (1986), to develop<sup>a theoretical</sup> framework for measuring the impact of taxation, government<sup>expenditures,</sup> capital, and labor supply on output growth.

Before deriving the model, it is useful to review<sup>some</sup> shortcomings of cross-country regression analysis. The usual criticism of these comparisons is that countries are suff'ciently dissimilar that<sup>they</sup> cannot be pooled together in a single data set; it makes little sense<sup>to</sup> interpret regression estimates based on, e.g., France and Burundi. While this paper restricts its attention to Sub-saharan Africa, the criticism<sup>is</sup> a general one for all regressions -- do the observations, whether of individuals, countries, or years, behave according to a similar structural model? If yes, then the reported regression results will provide<sup>estimates</sup> of the average, or representative parameters values. If not, the diversity should be readily reflected in insignificant regression<sup>coefficients (also</sup> see Landau, 1986).

A second problem with any regression is the possibility that measured independent variables proxy for the true, but unmeasured, factors which determine output growth. For example, countries with<sup>large mining</sup> sectors often rely heavily on corporate taxation. Downturns suffered by some mining industries during 1974-82 could therefore have led to a measured, but spurious, negative effect of corporate taxation on output growth. To correct at least partially for this problem, the regressions
-8-

include non-government variables which affect output growth, such as whether the country produces oil or mining outputs.

An additional problem is the proper measuremen, of effective tax rates. Developing countries often rely on non-tax constraints such as industrial licenses, foreign-exchange and price controls, quotas, and marketing boards, all of iwhich can be reflected in standard measures of tax rater. If the measured tax rates are not binding, then the regression results will indicate little or no role for these measured tax rates in determin'ng output growth.

The most serious shortcoming of cross-country regre 'in models is the potential endogeneity of the independent variables. Rapidly-growing c.untries may also experience high investment rates and government spending. For example, Ram's positive coefficient of government growth on output growth could be explained simply by the finding that expanding countries invest heavily in government services. While the 9-year accounting framework adopted by this paper corrects in part for short-run endogeneity in the independent variables, correcting for longer-term endogeneity is problematic.5 To simplify the theoretical analysis, I assume that the output of the economy is comprised of an untaxed (or, more generally, a lightlytaxed) sector and a taxed sector. For example, the untaxed sector might include services, small-scale production, the informal sector, and

> _5/_ Ram (1986b) argues on empirical grounds that there is little evidence in favor of government spending endogeneity. On the other hand, Laundau has attempted to control for the endogeneity problem by using lagged values of the suspected endogenous variables. However, Q regression coefficients on lagged endogenous variables (essentially VAR coefficients) are fine for prediction, but have no structural interpretation. For a simultaneous equations model of government spending and output growth, see Engen and Skinner (1988).
-9-

smallholder agriculture. The government sector<sup>'</sup> 8 included in the untaxed sector ecause the payroll taxes assessed<sup>on government wages are simply</sup> returned to the government, so the government<sup>pays only net wages. The</sup> taxed sector includes large-scale manufacturing and export industries. In many countries, the distinction between the two<sup>sectors is not sharp. The</sup> smallholder agricultural sector, for example,<sup>will escape the payroll</sup> (i.e., personal) and corporate tax, but the marketing<sup>board may impose an</sup> implicit output tax by paying farmers less<sup>than world prices.</sup> Let the taxed sector be x, and the untaxed n. Output<sup>(or GDP) is</sup> written where Pn and Px are the (fixed) prices to retailers<sup>or consumers in the</sup> untaxed and taxed sectors, respectively, and Qn and Qx are the equivalent quantities produced in each sector.

Value added in each sector is affected by government<sup>investments in</sup> infrastructure and other projects, and by government spending<sup>for current</sup> services. Let output in each sector be a<sup>function of these government</sup> acti.vities, plus private inputs; where Kn and Kx represent private capital<sup>in the untaxed and taxed sector,</sup> Ln and Lx measure labor in each sector, Kg measures<sup>public capital, and G</sup> is ciwrrent government consumption (excluding debt repayment). Total capital is KT - Kx + Kn + Kg , while total labor supply is<sup>L-Ln+Lx.</sup>
- 10

As discussed by Ram (1986), G is included in both sectors owing to possible external effects of government activity. Additionally, government capital, which appears as a "public good" in each production function, may affect output differentl) from private capital.

Many developing countries rely heavily on commodity taxes such as import, export, and sales taxation. The primary impact of each of these taxes is to drive a "wedge" between the producer price and consumer price of the output. In the case of sales or excise taxes, the tix would usually affect domestically produced goods, while export taxes would affect largescale exports. Import taxes might provide a subsidy for domestic importsubstituting industries, and thereby draw resources away from uses with higher social rates of return. For the purpose of the two-sector model presented below, ass'ime that a single commodity tax, ty, is imposed on the tax sector.

Output taxes can be shifted forward, through higher consumer prices, or shifted backwards, through a reduction in wages and interest rates. If the GDP price deflator is calculated properly, the consumer price distortion (or forward-shifting) of an excise tax should reduce GDP, since the value of the distorted consumption bundle, evaluated at the original factor prices, is l.ss than the value of the undistorted consumption bundle. This theoretical section focuses more on production distortions caused by backward-shifted taxes, but the empirical estimation procedure is perfectly general whether the tax is forward-shifted or backward-shifted. The regression coefficients measure the combined impact of the tax on output growth in constant prices.

Direct taxes such as the corporate and income tax will also affect the allncation of investment and labor supply. The income tax is a
combination of a payroll tax on wages and an interest income tax, while the corporate tax is imposed only on corporate accounting profits, and hence falls (nominally) on capital. In combination, these two taxes drive varying degrees of "wedges" between the gross and net interest rate and wage rate. Like the output tax ty, the tax on capital, tk and the tax on labor, t1 may be shifted back onto wages and interest rates, or forward onto higher consumer prices for the outputs. There is a strong equivalence between the two taxes; the combined tax wedge between the net and gross return on capital is rk - 1 - (l-ty)(l-tk) and for labor, 'l - 1 - (l-ty)(1-tl). That is, a 10 percent commodity tax has the same effect on incentives as a 10 percent tax on capital and labor (if there are profits, the commodity tax will raise more revenue). In the model below, the "capital" tax rk and the "labor" tax rl are used to summarize the combined distortions of direct and indirect taxes, although in the empirical section, each tax instrument will be entered separately.

Assume that total (privato) capital K - Kn + Kx and labor L - Ln + Lx are in fixed supply, but the share of the input in each sector deipends on the vector of taxes r - (rk,fl); where k(r) and pl(r) are the shares of K and L, respectively, in the untaxed sector. Next, a linear approximation of equation (1) is taken to derive a measure explain output growth. With the difference operator
- 12 -

denoted by A, and prices Pn and Px set to 1.0 without loss of generality, the change in output is written and where Fi and Hi, J-k,l,x,g are production function derivatives with respect to the four inputs: private capital, labor, government capital, and government consumption. The interpretation of each coefficient is straightforward. The parameter -. measures the combined shift in output of both sectors caw ed by a one-unit increase in the stock of government capital. Similarly, g measures the combined or "externality" effect on sectoral output of government consumption (e.g., government services).

The parameters Pk and 1l measure the average of the gross (or social marginal factor productivity of capital and labor, weighted by the input shares in the untaxed and taxed sectors. Rearranging Pk and P1 and differentiating with respect to r yields: k(r) - 8k(;) + (Fk-Hk)[dpk/drJ(v-) (5)

- ) 1(v) + (Fl-Hl)[dpl/dr](r-;)
- 13 -

where ; is the average, or representative tax vector for the country sample, and dpk(r)/dr and dpl(r)/dr are 2xl matrices measuring the (linear) impact of the country-specific tax vector r on the share of capital, and of labor, in the untaxed sector. That is, each country-specific coefficient Pk and 1l consists of a measure of marginal productivity _B(;)_ which is common to all countries, plus an addition term which measu.it= the tax-induced effects on aggregate marginal productivity. This second term has a straightforward interpretation: the change in the share of aggregate capital and labor changes flowing into the untaxed sector, times the difference in marginal productivity of the untaxed versus the taxed sector. For example, if a heavy capital tax caused the share of new capital in the taxed sector to fall by 5 percent, overall capital productivity would change by 5 percent times the difference between the marginal returns in the two sectors. Since the n after-tax return will tend towards equilization, in general Hk > Fk, and H1 > F1. The "own price" effect of a tax on capital or labor is to reduce its share in the taxed sector, so that apk/afk, _apl/al_ > 0. Hence from (5), increasing rk or '1 reduces the marginal productivity of capital or labor.

While I have argued above that the difference in marginal productivity, Fk - Hk, and F1 - H1, are negative, the existence of external or "spillover" effects in the untaxed sector could cause this difference to be positive (Feder, 1982). Given that the sectors most often viewed as providing "spillover" externalities, such as manufacturing and export industries, are generally in the taxed sector, a more plausable story might suggest that external effects exacerbate the existing tax distortion.

The growth equation presented above is also consistent with a neoclassical growth model in the steady state. Given a constant
-14

proportional growth rate in capital and labor equal of 0, the appendix demonstrates that the proportional. growth rate of output will be 0, regardless of the structure of taxes.

Dividing through by Y, and rearranging, yields the following expression for the rate of growth in GDP, Y, where proportional changes are denoted x - Ax/x, x - Y,L,G, P measures unbiased productivity change and other factors, private investment In - AK, government investment Ig - AKg, 01 - ~1(L/Y), the overall output elasticity with respect to labor, and Pk, 7x, and 7g retain their original definition since they are unit-free.

The next step is to specify how tax rates enter the estimation equation. Substituting from (5) into (6), and defining

> 6kj (Fk-Hk)aN/arJ

the econometric specification becomes with the coefficients Pk and A1 reflecting the interactive terms involving r; i - i(; 6 ikrk il;l' i-k,l.
- 15 -

The theoretical model implies that individual tax rates enter interactively with (Ip/Y), and with L, in the output growth equation. However, with a large number of tax rates, and possible errors in measurement for I., L, and the effective tax rates, it may also be useful to consolidate the interactive tax terms into a linear expression, either for each individual tax rate, or for an overall measure of the tax "burden" given by the ratio of tax revenue to GDP; and 0i - 6ki(Ip/Y) + i L, i-k,l. In the empirical section, the two tax terms are further condensed into the overall tax effort.

Finally, the third method of including taxation in an output growth equation is to focus on the ne return to factor inputs. Output growth can be expressoed as a function of net factor.returns, plus the change in tax revenue R, written The first two expressions on the RHS are the traditional increases in tax revenue caused by growth in capital and labor in the taxed sector. The third expression, in brackets, measures the increased revenue generated by positive externalities on the taxed sector from government activities.

At this point, we assume that net wages, or the net return on capital, are equal between the two sectors. If workers, or investors, are allowed to choose between the taxed and the untaxed sectors, their preference for higher net wages or interest rates will tend to drive such
> - 16 -

- rates in each sector to equality. Using the property that Pi Hi(l-ri), i-k,l, substituting in (10) and rearranging (9), output growth is expressed as

where R - AR/R, and the net factor returns are defined to be Pk - Fk, *** * *** p1 - FI(L/Y), ^ - Fi + H,(l-ry), and rg - Fg + Hg(l-ry). The coefficients with asterisks measure the after-tiax factor productivity, whether for private returns p: and _B*,_ or for government "external" effects<sup>7</sup> g and ',. Note that the net returns to government programs need only subtract the output tax ry, since they do not affect the taxes paid on factors, **Tk** and rl. A coefficient S on the revenue term is introduced to allow for the imperfect linkage between tax collections and measure'1 "constant price" GDP.

Even net labor and capital productivity are likely to depend on the tax vector r. Given a fixed level of capital, a capital tax in sector x will reduce the net return on capital when labor is held constant (although the problem becomes more complicated when labor is allowed to vary; Harberger, 1962). Hence a* and #* remain functions of r, and interactive terms involving Ip/Y and r, and L and r, are used in the empirical section. Strictly speaking, the impact of r on a* and P* is a second-order effect; hence squared terms involving capital and labor should also be included in the regressions. Empirical results which include these squared terms sharply reduce degrees of freedom, but have little effect on the other coefficient estimates.
-17-

In the next section, the model is generalized to include trade taxes, personal taxes and sales or excise taxes, and the derivation of appropriate tax bases is discussed. Additional factors which may have affected output growth during the period are also explored.

# III. Emuirical Implementation of the Theoretical Model

The assumption of a two sector model is an obvious simplification, and it is shown in the appendix that the results derived above carry over to many sectors. Corporate and personal taxes will likely affect the manufacturing and mining sectors, while the import tax is expected to provide protection for import-substitution industries. The export tax will affect export industries, while the sales/excise tax may distort the use of market goods versus home production. Each tax is entered separately in the regressions to reflect potentially different effects on output growth. The tax rates required for the empirical estimation are discussed as follows.

ImRort Tax: The most straightforward tax to calculate is the import tax, defined to be the ratio of import tax revenue to total imports. Error may be involved measuring this tax, since imports for government or foreign aid use may not be taxed, while non-tax exchange constraints could lead to unmeasured "shadow" tax rates. The import tax, and the variables that follow (unless otherwise noted), come from the IMF's Government Financial Statistics and the World Bank World Tables, collected in an integrated computerized data set in 1986 at the World Bank.

Exnlort Tax: The export tax is measured as export tax revenue divided by the export tax base. It is therefore an output tax on the export sector. The measured tax will likely be biased downward, since marketing boards often collect an implicit tax on exported agriculture.
- 18 -

Coroorate Tax: The corporate tax is expected to reduce the net return on capital in the coporate sector. Because many corporations are involved in manufacturing and exports (e.g., minerals, large-scale agriculture), the corporate tax base is defined to be manufacturing value added plus export sales. This tax base is a hybrid of value added (in manufacturing), which can proxy for corporate profits, and export sales, which may include the value of inputs purchased from other sectors. (Value added in export industries would be a better measure, but it is unavailable.) There is little chance of double counting the tax base, since less than 4 percent of African manufacturing is exported.

Personal Tax: The personal or individual tax is typically a payroll tax, often for workers in larger establishments, and for government workers. Thus the assumed personal tax base is the manufacturing sector plus government consumption (which proxies for the government wage-bill). The tax base will be biased upward to the extent that not all manufacturing is subject to payroll tax, but biased downward since some -export-oriented tirms are subject to taxation.6 Sales Tax: The sales and excise tax is calculated as the ratio of sales and excise taxes to manufacturing value-added plus imports, reflecting the usual targets of sales and excise taxes: imported goods and domestically manufactured products.

Ta Effort: The tax effort is the average ratio of tax revenue to GDP. Tax effort can proxy for the overall level of tax distortion (as in Marsden, 1983). Alternatively, a higher tax effort holding marginal tax rates constant is consistent with a broader overall tax base.

L/ Y'hile government workers are assumed to be in the untaxed sector (since taxes collected are paid back into the government) the proper calculatiin of the tax rate in the taxed (private) sector requires that government-consumption be included in the tax base.
- 19 -

Additional variables measuring the change in output, government expenditure, capital, labor, and other factors, are calculated in the following way: GDP Growth (Y): The growth rate is defined to be the average log growth in GDP measured at constant factor cost, or if factor cost measures were unavailable, at constant market prices. The change in output was taken over a 9-year period (or 8 or 7 years if recent data were unavailable) 1965-73, or 1974-82.

Weighted Government rrowth (G/Y1G): This variable is the share of government consumption to GDP averaged over the 9-year period (or 7-8 year period if data were missing) multiplied by G, the percentage change in government consumption. Government consumption from the national accounts does not include debt service, a budget item with presumably little productive value. Note that in the empirical section, the weighted variable may be decomposed into Government Consumption, defined as [G/Y], and Government Growth, G.

Private Investment (Ip/Y): This measure of the change in the private capital stock was calculated by accumulating the ratio of annual private investment to GDP over the 9-year period, depreciated at a yearly 8 percent rate. Annual private investment was calculated first by measuring A, the average ratio of public investment (defined as total minus current government expenditures) to total investment over the 9-year period.<sup>7</sup> Private gross investment in each year is then measured as (1-A) times total gross investment. Private capital growth over the 9-year period is written Z/ For some countries, as few as 3 of the 9 years were available for calculating A. It is therefore likely to be measured with some error.
20 where V(i) and Y(i) are investment and GDP in year i.<sup>8</sup> Note that this procedure cannot account for the loss of existing capital stock through depreciation.

Government Investment (M(g/Y): The change in government capital is simply the difference between accumulated total capital and accumulated private capital, or A/(1-A) times the LIS of (12).

Labor Supply Growth (L): Population growth (denoted Population) is used to proxy for the change in labor supply.

Inflation: The inflation rate is measured as the average annual growth rate in the GDP deflator. This variable is used in the investment regressions to proxy for a measure of real interest rates. If nominal rates are fixed, higher inflation rates could lead both to lower real borrowing costs, and higher returns to physical capital accumulation.

Other Variables: It is important to control for as many additional non-tax factors as possible that may affect the output of the economy. For example, a sharp decline in the terms-of-trade will lead to - fall in real GDP, independent of the tax system or of investment behavior. The terms of trade variables (expressed in percentage terms) were derived rom the GDP price deflators used in the World Tables and exchange rates. Using the alternative UN definition of the terms of trade in the regressions did not appreciably affect the other coefficients.

.L There is an alternative procedure for calculating AK/Y, which is to accumulate real investment over the 9-year period, and then divide by the initial year GDP. However, such a procedure introduces simultaneity bias, since even if all countries had constant investment to GDP ratios, countries which happened to enjoy high growth rates would also experience a higehr ratio of accumulated investment to initial GDP, leading to a spurious correlation between capital accumulation and output growth.
- 21 -

Countries which discovered and exploited oil resources (The Congo, Gabon, Cameroon, and Nigeria) are likely to have enjoyed higher growth rates through 1982, conditional on factor inputs and tax policy. Political instability can disrupt economic growth both through the destruction of property and capital, the flight of skilled workers, and the loss of new investment (Schneider and Frey, 1985; Stewart and Venieris, 1985). A variable measuring the number of "successful" coups during the period is included (Griffiths, 1984). Although coups are potentially endogenous (declining economic fortanes spur coup attempts), Wheeler (1984) finds that political disruption Granger-causes output changes, but not conversely. In the next section, sources of data are described, and regression results are reported.

# IV. Egirical Results

The data set described below will be used to estimate both the output growth model developed in Section III, and also to estimate investment demand equations. The data come from national accounts and government financial statistics. To abstract from short-term fluctuations, income growth is averaged over 9 years, 1965-73 and 1974-82.9 The period 1973-74 represents a significant transition for many countries from relatively stable growth to uneven development as rising oil prices and worldwide recessions led to declining export prices and increased debt. Although some export prices rose later in the 1970s, the second oil price increase in 1979-80, subsequent economic slumps, and increasing debt burdens all led to increasing stress on government tax collection efforts. Despite these downturns, government investment during 1974-82 was high relative to the previous period (Shalizi, Ghandi, and Ehdaie, 1985). Overall tax effort increased for Sub-saharan African countries during this 2/ In a few countries, 1974-81, growth rates were calculated; for Somalia, 1974-79 rates were measured.
- 22 -

period, although stepped up government expenditures more than offset the additional revenue, leading to increased deficits (Shalizi, Ghandi, and Ehdaie, 1985).

Wheeler (1984) used a number of variables to explain the economic downturns in many Sub-saharan African countries. Important factors were outbreaks of violence (or more exactly, years of peace), the terms of trade, the diversity of exports, whether the country exported minerals, the existence of foreign exchange controls, and a "habit" parameter that measures how imports respond to declines in foreign exchange. While the results presented below do not include all of his explanatory variables, they do generally confirm the effects of political instability and terms of trade on output growth. A study by Kormendi and McGuire (1985) which usod data from both developed and developing economies, suggest that other variables, such as the variability in money growth, the growth in exports, and the standard deviation of real outpu'. growth, can also explain differences across countries in output growth rates.

The sample of countries was selected by including all those which reported complete information on tax, output, and investment variables. A total of 56 observations remained; 27 countries from 1965-73 and 29 countries from 1974-82.10 This pooled cross-section time-series data set compares the growth experience of similar countries over time, and provides a larger number of observations than a simple cross-section data set. For some coefficients, such as the marginal product of capital, interactive terms are introduced which allow marginal productivity to differ across periods.

> 1Q/ In 1965-73, the countries were Benin, Cameroon, Chad, Congo, Gabon, Gambia, Guinea, Ivory Coast, Liberia, Mali, Nigeria, Senegal, Sierra Leone, Burkina Paso, Botswana, Burundi, Ethiopia, Kenya, Lesotho, Madagascar, Nalawi, Mauritius, Rwanda, Somalia, Sudan, Swaziland, and Zaire. In 1974-82, the Gambia, Guinea, Niger, and Zambia were included, while Madagascar and Gabon were dropped.
- 23 -

Table 1 presents regression results for the model in which taxes are entered linearly rather than interactively. Column (1) describes an output growth equation similar to that estimated by Ram (1986). Government investment is estimated to be highly productive during the period 1965-73; its marginal productivity is estimated to be a substantial 0.534, which is significant at the .10 level, and larger than the corresponding marginal productivity for private investment. However, the dummy variable for the period 1974-82 interacted with public investmet. (Public Investment 74-82) indicates a dramatic fall in the productivity of government capital during this latter period from .532 to -.077. By contrast, the marginal productivity of private capital exhibited no consistent change during this. period.

Column (2) provides a simple measure of cumulative tax distortions with the use of Tax Effort which is interacted with Private Investment and - with Poulation (this is roughly equivalent to assuming that rk rl). The predicted effect of a 3 percentage-point increase in tax effort is to reduce output growth by 1/2 percentage points, an estimate which is significant at the .05 level.<sup>12</sup>

- 11/ The interpretation of the privat and public investment coefficients as "marginal productivities" is consistent with a production function model in which output depends, in the long run, on the supply of inputs. In a traditional Keynesian model, autonomous investment will be a function of Y, which reverses the causal relationship posited above. I hope to correct for this reverse causation by (i) using a nine-year period, and (ii) using I/Y to measure investment, so that an increase in Y which causes an autonomous, equal percentage increase in I will have no effect on the independent variable.

- 12/ The sample means of Ig/Y and L are 11.5 and 2.7 percent, respectively. The effect of a 5 percent increase in tax effort is therefore 5(-.005x11.5+-.048x2.7). The test of joint significance of both coefficients is significant at the 0.08 level. While the taxation t- statistics are insignificant, they are irrelevant for testing the hypothesis that taxation is important.
- 24 -

Recall that ';eightcd Government Growth measures (G/Y'lG. Assuming an average 5.7 percentage point growth rate G, the regression in column (2) predicts that a per.-,anent three percent increase in G/Y financed by i..¢reasing the tax effort will reduce output growth rates by 0.3 percentage points, although this prediction is not significant at conventional levels.

The third column once again uses Tax Zffort to proxy for the overall degree of tax distortions, although in this case it is entered linearly; as in (9), rather than interactively. The coefficient is negative and significant.

Column (4) expands the regression to include different measures of tax distortion which are entered linearly. One notable aspect of these equations is the significant and negative impact of direct taxation (corporate and personal) on output growth rates. A one percentage point increase in the personal tax (equivalent to a 17 percent increase in personal tax rates) is predicted to reduce output growth rates by 0.36 percentage points. The coefficients for the import, export, and sales taxes, however, are insignificant, with coefficients near zero.

The possibility that mineral exporting countries (Liberia, Sierra Leone, Zaire, Guinea, and Zambia; see Wheeler, 1984) subject to high corporate tax rates suffered output downturns because of trade-related problems rather than high corporate tax rates was tested by including a mineral exporting dummy variable. The regression (not reported) showed only minor differences in the taxation coefficients.

Landau (1983; 1986) has suggested that the ratio of government consumption to GDP, G/Y, be entered as a component in GDP growth rates. While it is difficult to justify its inclusion on a theoretical basis (as discussed in the previous section), it is included nonetheless in the final
- 25 -

"portmanteau" regression in Table 1. The coefficient on G/Y is negative and significant. One explanation for this finding is that countries with higher levels of G/Y are likely to have experienced higher growth rates in government spending during the past few decades. The resulting long-term reduction of private economic activity could have reduced subsequent output growth.

Table 2 presents regression results when the tax rates are interacted both with capital accumulation and with population (or labor supply) growth. The coefficients on these interacted terms are interpreted as the effect of a one percentage point increase in the tax rate on the marginal product of capital, or of labor. To begin, column (1) in Table 2 interacts the tax rates only with the growth in capital, since population may be an imperfect proxy for labor supply growth. The results are consistent with the previous regressions; a 1 percentage point increase in the corporate tax rate (or a 17 percent increase in rates) and a 1 percentage point increase in the personal tax rate (or an 18 percent hike in rates) is predicted to reduce the marginal product of capital by 1.0 percentage point and 2.4 percentage points, respectively. The other taxes are insignificant and small in magnitude.

Whken the tax variables are interacted with both capital and labor growth (column 2), it appears that the t-statistics on the corporate and personal tax are no longer significant. However, the test of whether the individual taxes are significance is given by the combined effect of a given tax on both labor and capital productivity. Evaluated at the sample means, these linear combinations are significant and negative, indicating, as above, that the effect of the corporate and personal tax on output growth is negative and significant at the 0.05 level; other tax measures are insignificant.
- 26 -

Finally, the third column in Table 2 presents coefficient estimates of the net return to factor inputs, along thi lines of<sup>equation</sup> (11). The estimated effects of the different tax instruments are similar to those reported in column (2). The coefficient on<sup>the weighted tax</sup> variable (i) is similarly significant, and close to one in value.

As noted previously, there are two paths by which taxes can affect income growth. The first is through the productivity of<sup>inputs, as the</sup> regressior- **a** bove have been attempting to measure. The second is<sup>through</sup> the supply of factors; higher tax rates may reduce labor supply and<sup>the</sup> supply of investment.

A regression which explains private investment for the sample is presented in column 1 of Table 3. In this first regression, tax variables are excluded; coups have a signficant negative effect on investment, while oil producing countries tended to have investment rates 7.5<sup>percentage</sup> points above non-oil producing countries. In addition, the impact<sup>of</sup> government consumption (e.g., government current expenditures)<sup>on</sup> investment appears to be positive and significant.

Column (2) includes the overall tax effort. Surprisingly, the coefficient is positive; countries with higher tax rates experience higher investment rates.<sup>13</sup> One explanation is that increased tax revenue scales back deficits and, by freeing private savings from government use, increases the supply of funds for private investment purposes. There are two problems with this explanation. The first is that the primary source of private investment in Africa is from foreign sources (or retained earnings of partially foreign-owned corporations); domestic savings in most

> 13/ This finding echoes Koester and Kormendi (1988), whc used a larger data set of 63 countries.
> - 27-

countries is not large. The second problem with this explanation is that if the supply of investment funds depended on the difference between government expenditures and tax revenue, the coefficient on government -- expenditures (or consumption) should be negative and of equal magnitude which it is not. Different specifications of the tax effort variable (e.g., including its squared value) affected the tax effort coefficient only minimally, nor does including both tax effort and tax growth (column 4) affect the strong positive impact of tax effort on capital accumulation.

When both the tax effort, and the individual tax rates, are included, the impact of government consumption drops from 0.386 (in column 1) to an insignificant 0.028, conditional on overall tax effort. Furthermore, import taxes, export taxes, and corporate taxes all exhibit strong negative effects on investment behavior. The R2 rises from .292 to .559 with the introduction of these tax variables.

The corporate tax is likely to reduce equity investment since the tax assessed against corporate profits is often quite substantial unless offset by investment incentives and tax holidays. Similarly, the export tax will reduce the the net return to large-scale investment necessary in export--oriented industries; holding total tax revenue constant, a 10 percentage point increase in the export tax is predicted to reduce annual investment by 30 percent. Assuming the marginal product of capital is 12 percent, such an increase in the export tax would (indirectly) reduce output growth by 0.36 percentage points.

The negative impact of import taxation on investment suggests that investment is not necessarily attracted to c- ntries which erect tariff barriers to protect iraport-substitution industries. If existing importsubstitution industries have exploited domestic markets, new invetment might be directed towards projects which can be exported as well. Hence
- 28

high tariffs on intermediate and capital imports could discourage exportoriented investment.

Taxes affect output directly by changing the marginal productivity of capital and labor, and indirectly, by changing the supply of factors. The combined effects may be estimated using Column (4) in Table 1 (the direct effect) and Column (3) in Table 3 (the indirect effect). The private marginal product of capital in 1974-82 from Column (4), 0.12, is used to translate the effect of differences in accumulated capital on output. For example, the effect of changing the import tax by one percentage point is simply the direct effect, -0.014, plus the indirect effect -0.12(0.249), or -0.04. Since the average import tax was 16.1 percent, a 20 2ercent increase (or a 3.2 percentage point increase) in the import tax would lead to a 0.14 percent decline in output growth.<sup>14</sup> A 20 percent increase in the personal tax is predicted to reduce output growth by 0.41 percentage points, a 20 percent increase in the corporate tax is estimated to dampen output growth by 0.17 percentage points, while the export tax is expected to cut back output growth by a trivial 0.06 percentage points. The sales tax is estimated to have no effect on GDP growth or investment.

These estimates can be used to predict how output growth would be affected by a revenue neutral change in the structure of taxation. The effect c,i ou±tput growth of cutting the import, export, personal, and corporate tax rates by 20 percent and replacing the lost revenue by the domestic sales tax is simply the measures calculated above since output growth is predicted to be unaffected by the sales or consumption tax. A revenue neutral shift from the personal tax to the sales tax, for example, is estimated to increase output growth by 0.40 percentage points.

i The estimates are based on holding revenue (or tax effort) constant.
- 29

A different question which can be addressed<sup>with these data is,</sup> what were the costs of the increased<sup>tax effort in African countries</sup> between 1965-73 and 1974-82? Evidence<sup>from column (2) in Table 1 suggests</sup> that the tax instruments that governments used<sup>to increase tax effort lead</sup> to a sharp decline in output growth; the direct<sup>effect of increasing the</sup> tax effort by 5 percentage points was a<sup>0.9 percentage point decline in</sup> output growth rates (5x.187, from above).<sup>Accounting for the indirect</sup> positive effect of tax revenue on investment<sup>attenuates this measure by 0.3</sup> (5x.498 x .12), where .498 is the coefficient<sup>from Column 3, Table 3 and</sup> .12 is the marginal product of capital); hence<sup>the total effect of the</sup> increased tax revenue between 1965-73 and 1974-82<sup>was to reduce output</sup> growth by 0.6 percentage points each year. Had this<sup>revenue been used to</sup> finance government investment projects during 1965-73,<sup>growth rates are</sup> predicted to have been augmented substantially.<sup>However, during the later</sup> period 1974-82, the marginal productivity of government<sup>investment was</sup> negligible, so a 5 percent increased tax<sup>effort to finance public</sup> investment during this period would have reduced output<sup>growth rates by the</sup> same 0.6 percentage points. A similar calculation<sup>reveals that using the</sup> revenue to finance government consumption<sup>during the entire period 1965-82</sup> would have led to a small decline in output growth<sup>rates.</sup> V. Conclusion This paper has presented a framework<sup>for measuring how the</sup> structure of taxation and government spending<sup>affect output growth. It is</sup> shown that when countries are not following<sup>a steady-state growth path,</sup> static and dynamic tax distortions will<sup>affect output growth.</sup> In particular, taxes can affect output<sup>by (1) reducing the marginal</sup> productivity of capital and labor, and (2)<sup>reducing the supply of capital</sup> and labor.
- 30 -

Government expenditures also provide positive benefits; taxinduced distortions may be justified by the positive benefits of government programs financed by the additional revenue. This paper allows this tradeoff to be evaluated by including both government spending and tax variables in an econometric model explaining output growth.

The model was tested using 31 African countries during the periods 1965-73 and 1974-82. It was found that the tax structure was an important determinant of output growth; personal and corporate taxation reduce output growth, while import, export, and corporate taxes discourage investment. Although the costs of tax-financed government investment were justified by its high marginal productivity during the period 1965-73, the sharp decline in marginal productivity after 1973 suggested that tax-financed public investment during 1974-82 reduced output growth rates.

The distortionary costs of taxation differ depending on whether trade, indirect, or direct taxation is used. In particular, a revenue neutral shift away from personal, corporate, and import taxes to domestic sales (or consumption based) taxes is predicted to Increase output growth.

One difficulty with this estimation exercise is the accurate construction of the data. In particular, the effective tax base is difficult to derive; even if, for example, corporate profits could be determined, the appropriate corporate tax base would still be adjusted by depreciation allowances and investment tax credits. Furthermore, tax rates are rarely proportional so that the calculated average ratios may understate the effective marginal rate (Koester and Kormendi, 1988).

All studies explaining how government expenditure and tax policies "explain" GDP growth rates suffer from a potential endogeneity problem, since government polinies themselves will be strongly affected by economic conditions. Bolnick (1978) and Engen and Skinner (1988) have made first
- 31 -

steps in the direction of developing a simultaneous model of government policy, but much remains for future research.

This paper indicates that differences in tax policy can explain a substantial degree of variation in output growth among African countries. While measurement error and the potential for excluded variables suggest that the regression results be interpreted cautiously, the results imply that the structure, and not simply the level, of taxation can play an important role for encouraging growth in developing economies.
> - 32 -

Iable 1 : GDP Growth Regressions, Sub-Saharan Africa, 1965-82

|[Variable)|(1)|(2)|(3)|(4)|(5)|
|---|---|---|---|---|---|
|Oil|1.684<br>|1.861<br>|1.869<br>|2.238<br>|1.412<br>|
||(1.41)<br>|(1.61)<br>|(1.68)<br>|(1.80)|(1.22)|
|Coups|-0.943<br>|-1.016<br>|-1.116<br>|-0.824<br>|-0.769<br>|
||(1.99)<br>|(2.39)<br>|(2.50)<br>|(1.79)|(1.79)|
|Private Investment|1.050<br>|0.213<br>|0.150<br>|0.052<br>|0.137|
||(0.85)<br>|(0.73)|(1.20)|(0.40)|(1.12)|
|Priv Invest 74-82|-0.043<br>|0.037<br>|0.039<br>|0.069<br>|0.104<br>|
||(0.29)<br>|(0.24)<br>|(0.27)<br>|(0.47)|(0.77)|
|Public Investment|0.534<br>|0.744<br>|0.828<br>|0.635<br>|0.862<br>|
||(1.82)<br>|(2.50)<br>|(2.83)|(2.29)|(3.25)|
|Public Inv 74-82|-0.611<br>|-0.653<br>|0.711<br>|0.635<br>|-0.179<br>|
||(1.88)<br>|(2.07)<br>|(2.33)<br>|(2.06)|(2.60)|
|Population|0.665<br>|1.651<br>|0.814<br>|0.475<br>|0.342<br>|
||(1.21)<br>|(1.03)<br>|(1.58)<br>|(0.86)|(0.66)|
|Terms of Trade|0.134<br>|0.093<br>|0.090<br>|0.169<br>|0.192<br>|
||(1.47)<br>|(1.03)<br>|(1.05)<br>|(1.88)<br>|(2.18)|
|Gov Growth x Gov Share|0.015<br>|0.010<br>|0.010<br>|0.007|0.009|
||(2.120)|(1.90)|(2.05)<br>|(1.44)|(2.00)|
|Tax Effort (R/Y)|||-0.262<br>||-0.117|
||||(2.82)||(1.20)|
|Tax Eff. x Priv. Inv.||-0.005||||
|||(0.31)||||
|Tax Eff. x Pop. Growth||-0.048<br>||||
|||(0.61)||||
|Import Tax||||-0.014|-0.011|
|||||(0.19)|(0.16)|
|Export Tax||||-0.010|-0.010|
|||||(0.16)|(0.17)|
|Personal Tax||||-0.357<br>|-0.342<br>|
|||||(2.96)<br>|(2.93)|
|Corporate Tax||||-0.125|-0.135|
|||||(2.21)|(2.52)|
|Sales Tax||||-0.001|0.042|
|||||(0.01)|(0.55)|
|Government Share|||||-0.190<br>|
||||||(2.67)|
|1974-82 Interaction|0.672|-0.113|0.060|0.097|0.117|
||(36)|(006)|(034)|(005)|006|
||.<br>|.|.|.|(.)|
|Constant|-1.460<br>|-1.674<br>|2.117<br>|3.502|6.311|
||(.07)|(0.75)|(1.00)|(1.16)|(2.17)|
|Rt2|0.369|0.412|0.453|0.466|0.572|

Not: Dependent variable is average annual logarithmic growth rate of GDP. Absolute value of t-statistics in parentheses.
33 Table 2: Interacted GDP Growth Equations, Sub-Saharan Africa, 1965-82

||(1)|(2)|(3)|
|---|---|---|---|
|Oil|2.534|3.525|3.462|
||(2.08)|(2.18)|(2.21)|
|Coups|-0.827|-0.661|-0.662|
||(1.93)|(1.30)|(1.35)|
|Private Investment|0.260|0.519|0.382|
||(1.75)|(1.11)|(0.83)|
|Priv. Invest. 1974-82|<br>0.105|<br>0.086|0.063|
||(0.74)|(0.53)|(0.40)|
|Publin Investment|0.583|0.510|0.228|
||(2.16)|(1.57)|(0.65)|
|Public Invest. 1974-82|-0.617|-0.612|-0.360|
||(2.04)|(1.81)|(1.01)|
|Population|0.532|C.128|0.379|
||(0.94)|(0.06)|(0.20)|
|Terms of Trade|0.182|0.207|0.208|
||(2.13)|(2.20)|(2.28)|
|Gov Growth x Gov Share|0.718|0.668|0.390|
||(1.60)|(1.30)|(0.75)|
|Import Tax x Invest|-0.004|-0.020|-0.016|
||(0.59)|(0.95)|(0.81)|
|Export Tax x Invest|-0.003|0.010|0.009|
||(0.60)|(0.58)|(0.53)|
|Personal Tax x Invest|0.024|-0.006|0.005|
||(2.88)|(0.17)|(0.13)|
|Corporate Tax x Invest|-0.010|-0.031|0.023|
||(2.53)|(1.20)|(0.86)|
|Sales Tax x Invest|-0.000|-0.021|-0.024|
||(0.01)|(0.74)|(0.84)|
|Import Tax x Pop.||0.054|0.036|
|||(0.68|(0.46)|
|Export Tax x Pop.||-0.068|*-0.055|
|||(0.87)|(0.72)|
|Personal Tax x Pop.||-0.098|-0.128|
|||(0.55)|(0.74)|
|Corporate Tax x Pop.||0.088|0.041|
|||(0.76)|(0.35)|
|Sales Tax x Pop.||0.095|0.125|
|||(0.69)|(0.93)|
|Tax rate x Tax Growth|||0.965|
||||(1.79)|
|1974-82 Interaction|-0.244|0.100|-0.084|
||(0.13)|(0.05)|(0.04)|
|Constant|1.240|0.739|1.127|
||(0.61)|(0.32)|(0.50)|
|R2|0.505|0.465|0.469|

Note: The dependent variable is the annual logarithmic growth rate in GDP. Absolute values of t-statistics are in parentheses.
34 -

# I&bILI: Private Investm,ent Regressions: Sub-Saharan Africa, 1965-82

|Independent<br>Variables|(1)|(2)|(3)|(4)|
|---|---|---|---|---|
|Oil|7.468|6.424|4.870|4.549|
||(4.06)|(3.64)|(2.84)|(2.83)|
|Coup$|-1.652|-1.019|-0.334|-0.352|
||(2.12)|(1.33)|(0.47)|(0.53)|
|Population|1.146|0.712|-0.155|-0.475|
||(1.22)|0.80)|(0.18)|(0.58)|
|Terms of Trade|-0.235|-0.177|<br>0.024|-0.053|
||(1.56)|(1.24)|(0.17)|(0.39)|
|Government Share|0.386|0.256|0.028|0.047|
||(3.19|(2.08)|(0.24)|(0.41)|
|Government Growth||||0.132|
|||||(1.25)|
|Tax Effort||0.381|0.493|0.486|
|||(2.81)|(3.70)|(3.89)|
|Tax Growth||||0.198|
|||||(2.10)|
|Import Tax|||-0.249|-0.234|
||||(2.43)|(2.44)|
|Export Tax|||-0.328|-0.309|
||||(3.43)|(3.45)|
|Personal Tax|||-0.208|-0.052|
||||(1.11)|(0.28)|
|Corporate Tax|||-0.171|-0.161|
||||(2.00)|(2.00)|
|Sales Tax|||0.006|0.112|
||||(0.05)|(0.93)|
|Inflation|||<br>0.144|0.213|
||||(1.52)|(2.26)|
|1974-82 Interaction|<br>0.260|-0.467|<br>-0.883|-1.028|
||(0.21)|(0.40)|(0.73)|(0M9M)|
|Constant|1.971|-1.658|10.513|6.519|
||(0.58)|(0.20)|(2.59)|(1.59)|
|ft<sup>2</sup>|0.292|0.379|0.559|0.616|

Note: Dependent variable is the share of private investment to GDP. Absolute value of t-statistics in parentheses. N - 56.
- 35 -

# Bibliogr,agbhy

Auerbach, Alan, Laurence Kotlikoff, and Jonathan Skinner, "The Efficiency Gains from Dynamic Tax Reform", International Economic Review, (February 1983).

- Bolnick, Bruce, "Demographic Effects on Tax Ratios in Developing Economies," Junal of Development Economics 5 (1978) pp. 283-306.

- Brent, Robert J., "Lagged Reactions in Short-Ru' Estimates of Tax Shifting of Company Income and Sales Taxes in Kenya," Journal of DeveloDment Economais 20 (1986): pp. 15-32.

- Chamley, Christophe, "Taxation in Dynamic Economies: Some Problems and Methods," mimeo, World Bank, CPDRM (October 1983).

- Clarete, Ramon, and John Whalley, "Comparing the Marginal Welfare CosLs of Commodity and Trade Taxes," Journal of Public Economics 33 (October 1987): pp. 357-62.

- David, Paul, "Invention and Accumulation in America's Economic Growth: A NineteenthCentury Parable," In Brunner and Meltzer (eds.) Industrial Organization. National Policies. and Economic Develonment (Amsterdam, 1977).

- deMelo, J., "Estimating the Costs of Protection: A General Equilibrium Approach", Ouarterly Journal of Economics (1978), pp. 209-226.

- Engen, Eric, and Jonathan Skinner, "Government Size, Economic Growth, and Taxation," mimeo (May 1988).

- Feder, Gershon, "On Exports and Economic Growth", Journal of Development conomics 12 (1982) pp. 59-73.

- Griffiths, Ieuan LL., An Atlas of African Affairs. New York: Methuen (1984).

- Harberger, Arnold C., "The Incidence of the Corporation Income Tax," Journal of Public Economics (June 1962): pp. 215-40.

- Henderson, J.M., "Optimal Factor Allocation for Thirteen Countries", in A.0. Krueger, ed. Trade and Employment in Developing Countries (2). Chicago: University of Chicago Press (1982).

- Koester, Reinhard B., and Roger C. Kormendi, "Taxation, Aggregate Activityand Economic Growth: Cross-Country Evidence on Some Supply-Side Hypotheses,' Economic Inguiry (forthcoming 1988).

- Kormendi, Roger C., and Philip G. Meguire, "Macroeconomic Determinants of Growth: Cross-Country Evidence," Journal of Monetary Economics 16 (1985): pp. 141-63.
- 36 -

- Krueger, Anne O., "Trade Policies in Developing Countries",in R. W. Jones and P. B. Kenen, eds. Handbook of International Economics, Elsevier Science Publishing (1984).

- Landau, Daniel, "Government Expenditures and Economic Growth: A CrossCountry Study," Southern Economic Journal 49 (January 1983): pp. 783-92.

- Landau, Daniel, "Government and Economic Growth in the Less Developed Countries: An Empirical Study for 1960-80," E5onomic Development and Cultural Change (October 1986): pp. 35-75.

- Lucas, Robert E., "On the Hechanics of Economic Development", mimeo, University of Chicago (1985).

- Manas-Anton, Luis A., "Structure of Taxation and Growth in Developing Economies", Mimeo, IMF Fiscal Affairs Department (September, 1985).

- Marsden, Keith, "Links Between Taxes and Economic Growth: Some Empirical Evidence," World Bank Staff Working Paper #605, (August, 1983).

- Martin, Ricardo, "Fiscal Variables and Growth: A Cross Sectional Analysis," mimeo (n.d.).

- Ram, Rati, "Government Size and Economic Growth: A New Framework and Some Evidence from CrossSection and TimeSeries Data," American Economic Review 76 (March 1986a) p. 191-203.

- Ram, Rati, "Causality Between Income and Government Expenditure: A Broad International Perspective," Public Finance/Finance Publigues (1986) 41(3): pp. 393-413.

- Robinson, Sherman, "Sources of Growth in Less Developed Countries: A Gross-Section Study", Ouarterly Journal of Economics (1971) pp. 391-408.

- Schneider, Friedrich, and Bruno S. Frey, "Economic and Political Determinants of Foreign Direct Investment," World DeveloRmet 13 (1985): pp. 161-175.

- Seidman, Laurence S., "Conversion to a Consumption Tax: The Transition in a LifeCycle Model," Journal of Political Economy 92 (April 1984) pp. 247-67.

- Shalizi, Z. V. Gandhi, and J. Ehdaie, "Patterns of Taxation in Sub-SaharanAfrica: Trends in 'Tax Effort' and Composition during the period 1966-81", mimeo, The World Bank (1985).

- Stewart, Douglas B. and Yiannis P. Venieris, "Sociopolitical Instability and the Behavior of Savings in Less-Developed Countries", Review o Economics and Statistics, (November, 1985), pp. 557-63.

- Taylor, L., and S.L. Black, "Practical General Equilibrium Estimation of Resource Pulls under Trade Liberalization", Journal of International Economics (1974) pp. 37-55.
- 37 -

Virmani, Arvind, "Tax Reform in Developing Countries: Issues, Policies, and Information Gaps," mimeo, World Bank (May 1985).

- Wheeler, David, "Sources of Stagnation in Sub-Saharan Africa," Worl Development 12 (1984): pp. 1-23.

- World Bank, World Tables (3rd ed.), Baltimore: Johns Hopkins University Press (1984).
-38-

# Appendix: The Theoretical Model

This appendix discusses in more detail theoretical and empirical aspects of models which measure the effect of government fiscal policies on output growth rates.

# 1. Prooerties of the OutDut Growth Equation in the Neoclassical Steady State

Is the model developed in the text consistent with the neoclassical growth model? First assume that both F and G are linear homogeneous in all inputs, including government capital and government expenditures, a necessary assumption for a balanced growth path. Next consider a constant steady-state growth rate of population (or population. plus neutral productivity growth) equal to 0. For the steady-state to hold, where the country specific subscripts are ignored. because of linear homogeneity, Dividing each side of (A.2) by Y, Substituting from (A.1) - i (A.2), it is apparent that AY/Y - O, regardless. of what r, and hence Ok and 61. are.
39 In the econometric specification, it may appear that taxes affect output growth, even in the steady state. That is, rewriting (A.2), If #k and 01 differ systematically because of different tax policies, thvt the predicted growth rate of output will also vary, depending on tax policies -- even in the steady state. The apparent contradiction can be - resolved by noting that (for example) AK/Y [AK/K][K/Y], which in the steady state is simply OK/Y. For a country with a distortionary capital tax, Pk is lower than average. Since distortionary taxation leads to a lower level of output, Y in the country with a distortionary tax is also less than average. Hence for a given proportional growth in capital 6, AK/Y is higher than average when Pk is lower than average; on net, the two effects cancel out. Note that this problem does not arise in the case of labor supply, sir.ce the elasticity is measured. In some respects, assumptions about what is held constant is motivated by what data are available.

In sum, the model indicates that tax policy will have no effect on output growth in the steady state when both direct effects (conditional on AK/Y and AL/Y) and indirect effects (through differences in AK/Y and AL/Y) are accounted for.

2. Agglication of the Model to Three or More Sectors The extension to many sectors is straightforward. Consider, for example, a third sector, manufacturing, with a production function - - M(Km,Lm,Kg,G), a price Pm 1, and there is a single output tax rm; AK AKn + AKx + AKM, and equivalently for labor. Then the output growth - equation is written (for r Irk, rl,Tm)),
- 40 -

where pk(r) and pl(T) are the shares of capital and labor used in the manufacturing sector. It is straightforward to extend this model to derive the results presented in the text; thus more sectors does not change the basic results of the simpler two period model.

One complication that should be mentioned is the presence of revenue from, for example, an import tax. In the context of the three period model above, the import tax would have two effects. First, it would provide revenue on a tax base which is not measured in GDP. One way to handle this problem is to consider exports as an "input" into the purchases of imported goods. To the extent that imports are purchased using foreign currency obtained from exports, a higher tax on imports simply implies that more exports must be sold to purchase a given quantity of imports.

The second effect is that an import tax will distort the price of the domestic manufactured goods by providing protection. Thus if domestic manufacturing and imported manufacturing were perfect substitutes, the import tax would be equivalent to a subsidy for the manufacturing sector, so that an increase in domestic manufacturing output would effectively reduce tax revenue from imports.
- 41 -

# 3. Issues in the Measurement of Constant Price GDP

One difficulty with the estimation of GDP equations is the definition of constant prices. In the example above, import tariffs lead to higher prices for tradeable goods. However, if the tariffs had been in effect since the price indices were begun, then the value of domestic manufacturing would be overstated, since they would be valued at the protected price rather than the world (or potential import) price (Kreuger, 1984).

A related problem with the constant price series is the manner in which changes in tax rates are reflected in the price index. If income taxes are collected in the taxed sector, some of the tax will be shifted to the firm; and in turn some of that tax will ultimately be shifted to consumers. If such a price rise is corrected in the constant price series, then the reRorte price Px will appear not to rise. Hence the methods used for calculating constant price series, and the extent to which indirect taxes are shifted to consumers, can potentially affect the estimation results in ways that are difficult to determine.

Whether GDP should be measured at factor cost or at market prices is a difficult question. This paper uses factor cost measures where available to follow the convention that factor cost measures output measured at producer prices, and not at potentially arbitrary consumer prices reflecting any indirect tax rates.
- 42 -

# 4. The Data

Table A.1 provides a full print-out of most of the data used in this study. The data on coups is as follows. Countries with one coug in 1965-73: Mali, Congo, Somalia, Sudan, Ethiopia, Madagascar, Burkina Faso, Rwanda, Zaire, Benin, Lesotho; one coup in 1974-82: Burundi, Ethiopia, Liberia, Congo, Nigeria; two coups in 1965-73: Burundi, Nigeria, Ghana, Sierra Leone; two coups in 1974-82: Chad, Burkina Faso, Mauritania; three coups in 1974-82: Ghana. Additional information is available from the author.
- 43 -

# Table A.1: Data

1965-73

||Country|GDP<br>Growth|Priv.<br>Inv.|Public<br> <br>Inv.|Pop<br>Growth|Terms<br>of Trade|
|---|---|---|---|---|---|---|
|1.<br>|<br>Benin<br> <br>|1.780<br>|11.068<br>|0.872<br>|2.66<br> <br>|-1.72<br>|
|2.<br>|<br>Cameroon<br> <br>|4.120<br>|10.788<br>|1.472<br>|<br>1.95<br> <br>|-1.40|
|3.<br>|<br>Chad<br> <br>|-0.030<br>|7.009<br>|0.761<br>|<br>1.98<br> <br>|-0.24|
|4.|<br>Congo|6.120|19.533|1.607|<br>2.57|-3.03|
|5.<br>|<br>Gabon<br> <br>|7.140<br>|21.577<br>|5.193<br>|<br>0.69<br>|-0.04|
|6.<br>|<br>Gambia<br> <br>|5.330<br>|2.800<br>|3.010<br>|<br>3.22<br>|-2.42|
|7.<br>|<br>Ghana<br>|2.450<br>|5.422<br>|3.338<br>|<br>2.39|2.25|
|8.<br>|C6te d'Ivoir<br> <br>|e 6.650<br>|10.331<br>|4.839<br>|4.69<br>|3.61|
|9.<br>|<br>Liberia<br>|4.820|11.773|3.457|<br>3.27|-3.03|
|10.<br>|<br>Mali<br> <br>|2.720<br>|12.307<br>|0.593<br>|<br>2.55<br>|-5.16|
|11.<br>|<br>Nigeria<br> <br>|7.430<br>|12.999<br>|1.541<br>|<br>2.50<br>|1.80|
|12.<br>|<br>Senegal<br>|1.190<br>|10.137<br>|0.763<br>|<br>2.38<br>|-2.18|
|13.|Sierra Leone|3.280|8.144|2.966|<br>2.36|-3.42|
|14.|Burkina Faso|2.870|10.488|0.962|<br>1.99|-5.57|
|15.<br>|<br>Botswana<br> <br>|14.010<br>|19.291<br>|7.879<br>|<br>2.55<br>|1.01|
|16.<br>|<br>Burundi<br> <br>|4.590<br>|3.589<br>|1.341<br>|<br>1.85<br>|-1.53|
|17.<br>|<br>Ethiopia<br> <br>|3.910<br>|8.692<br>|1.558<br>|<br>2.46<br>|-0.05|
|18.<br>|<br>Kenya<br>|8.370|15.548|2.242|<br>3.62|-0.65|
|19.<br>|<br>Lesotho<br>|4.440<br>|6.333<br>|4.567<br>|2.23<br>|2.34|
|20.<br>|Madagascar<br> <br>|2.960<br>|8.627<br>|3.272<br>|<br>2.25|2.45|
|21.<br>|<br>Malawi<br> <br>|5.570<br>|10.884<br>|4.776<br>|2.87|1.06|
|22.|<br>Mauritius|2.890|9.735|4.015|1.62|-0.29|
|23.|<br>Rwanda|5.720|6.017|0.573|2.88|4.10|
|24.<br>|<br>Somalia<br>|3.420|9.224|1.306|2.83|-2.04|
|25.<br>|<br>Sudan<br> <br>|-0.700<br>|7.452<br>|2.618<br>|2.45|-8.71|
|26.|<br>Swaziland|6.810|15.288|4.162|2.73|-0.30|
|27.|<br>Zaire|4.030|14.001|5.499|2.37|-0.93|
-44-

# Table A.1 (Continued)

1974-82

||Country|GDP<br>Growth|Priv.<br>Inv.|Public<br> <br>Inv.|Pop<br>Growth|Terms<br>cf Trade|
|---|---|---|---|---|---|---|
|28.|<br>Benin|4.050|11.111|9.389|<br>2.91|-3.23|
|29.|<br>Cameroon|6.570|13.316|4.274|2.40|-2.01|
|30.|<br>Chad|-3.880|7.484|2.416|<br>2.06|-8.86|
|31.|The Congo|7.210|20.352|3.258|<br>3.10|-3.52|
|32.|<br> <br>Gambia|<br>0.530|<br>7.606|<br>8.174|<br> <br>2.49|-1.45|
|33.|<br>Ghana|-3.010|3.067|2.343|<br>2.90|-5.29|
|34.|<br>Guinea|2.730|2.630|6.630|<br>2.76|6.21|
|35.|C6te dllvoir|e 5.880|10.644|8.466|<br>4.06|-0.40|
|36.|<br>Liberia|0.000|15.338|6.542|<br>3.53|-3.11|
|37.|<br>Mali|5.870|9.418|2.152|<br>2.69|-0.06|
|38.|Mauritania|2.220|18.115|10.145|<br>2.34|-0.01|
|39.|<br>Niger|5.690|15.330|4.451|<br>3.20|-0.44|
|40.|<br>Nigeria|0.700|13.272|6.508|<br>2.72|4.89|
|41.|<br>Senegal|3.630|12.162|1.898|<br>2.75|-3.18|
|42.|Sierra Leone|1.740|4.558|6.642|<br>2.71|-1.11|
|43.|Burkina Faso|3.280|15.513|1.367|<br>2.13|-3.90|
|44.|<br>Botswana|7.560|22.579|10.431|<br>3.63|-3.55|
|45.|<br>Burundi|4.530|1.132|8.978|<br>2.22|-4.08|
|46.|<br>Ethiopia|2.250|5.002|2.938|<br>1.87|-3.63|
|47.|<br>Kenya|3.950|16.726|4.884|<br>4.08|-3.62|
|48.|<br>Lesotho|4.830|17.647|13.313|<br>2.37|-0.61|
|49.|Malawi|3.810|14.202|8.128|<br>3.09|-4.13|
|50.|<br>Mauritius|3.730|18.242|4.618|<br>1.53|-6.32|
|51.|<br>Rwanda|6.270|11.679|3.371|<br>3.45|-1.75|
|52.|<br>Somalia|8.870|10.945|7.575|<br>2.80|14.70|
|53.|<br>Sudan|6.990|9.792|4.318|<br>3.07|-3.14|
|54.|<br>Swaziland|4.110|15.984|7.556|<br>3.53|-1.57|
|55.|<br>Zaire|-1.470|15.813|6.427|<br>2.99|8.32|
|56.|<br>Zambia|-0.760|14.676|4.044|3.20|-8.39|
- 45 -

# Table A.1 (Continued)

1965-73

||Country|Gov.<br>Cons.|Gov.<br>Growth|Tax<br>Effort|Import<br> <br>Tax|Export<br>Tax|
|---|---|---|---|---|---|---|
|1.|<br>Benin|12.300|<br>2.700|12.03|18.12|1.72|
|2.|<br>Cameroon|8.900|<br>5.020|13.18|24.50|6.65|
|3.|<br>Chad|17.950|<br>5.700|12.81|14.69|4.44|
|4.|<br>Congo|19.210|<br>7.100|18.80|12.91|2.79|
|5.|<br>Gabon|16.670|<br>8.800|19.24|18.48|5.61|
|6.|<br>Gambia|20.900|<br>2.200|13.14|18.89|3.53|
|7.|<br>Ghana|12.100|-1.600|14.30|15.53|18.47|
|8.|C6te d'Ivoire|10.100|12.600|20.09|17.46|10.26|
|9.|<br>Liberia|12.420|<br>3.100|15.54|11.84|0.40|
|10.|<br>Mali|18.400|-2.500|9.63|11.15|4.87|
|11.|<br>Nigeria|6.650|12.700|7.89|15.69|2.62|
|12.|<br>Senegal|17.810|-0.900|16.08|21.61|4.34|
|13.|Sierra Leone|14.830|<br>4.000|14.44|20.93|3.88|
|14.|Burkina Faso|8.880|<br>7.900|10.98|21.33|2.43|
|15.|<br>Botswana|21.140|<br>5.700|14.51|14.48|1.97|
|16.|<br>Burundi|9.420|<br>9;600|10.18|20.05|13.23|
|17.|<br>Ethiopia|7.980|<br>3.900|9.31|24.96|7.37|
|18.|<br>Kenya|15.270|11.000|13.93|.13.84|0.26|
|19.|<br>Lesotho|14.040|<br>4-.000|14.40|13.68|2.86|
|20.|<br>Madagascar|19.270|<br>2.100|14.74|22.62|5.03|
|21.|<br>Malawi|15.500|<br>3.800|11.30|12.01|0.00|
|22.|<br>Maxlritius|11.230|<br>2.500|18.00|12.62|3.28|
|23.|<br>Rwanda|9.410|<br>2.200|7.93|13.53|13.44|
|24.|<br>Somalia|14.440|17.100|12.92|23.83|4.12|
|25.|<br>Sudan|22.330|<br>2.700|16.22|36.02|6.59|
|26.|<br>Swaziland|14.980|10.000|16.08|10.52|0.09|
|27.|<br>Zaire|21.880|<br>5.400|25.30|16.35|24.96|
- 46 -

# Table A.1 (Continued)

1974-82

||Country|Gov.<br>Cons.|Gov.<br>Growth|Tax<br>Effort|Import<br> <br>Tax|Export<br>Tax|
|---|---|---|---|---|---|---|
|28.|<br>Benin|11.830|4.600|17.18|17.00|<br>1.44|
|29.|<br>Cameroon|8.140|1.070|15.13|18.99|<br>5.90|
|30.|<br>Chad|18.170|-7.000|12.30|12.97|<br>3.63|
|31.|<br>The Congo|16.900|4.500|20.46|8.84|0.35|
|32.|<br> <br>Gambia|<br>20.940|<br>7.900|<br>13.85|16.06|<br>3.12|
|33.|<br>Ghana|16.390|9.400|<br>8.33|12.12|22.16|
|34.|<br>Guinea|16.580|6.000|16.54|22.04|22.83|
|35.|C6te d'Ivoir|e 13.970|11.100|21.31|21.60|<br>7.21|
|36.|<br>Liberia|12.570|2.700|19.98|10.86|<br>0.18|
|37.|<br>Mali|20.020|9.000|12.80|7.73|5.70|
|38.|Mauritania|31.700|7.100|19.69|9.05|1.51|
|39.|<br>Niger|11.480|2.600|12.96|13.54|<br>3.25|
|40.|<br>Nigeria|12.070|7.400|19.08|11.31|<br>0.03|
|41.|<br>Senegal|19.700|7.000|17.44|15.04|<br>1.70|
|42.|Sierra Leone|11.180|0.000|16.47|17.89|<br>8.14|
|43.|Burkina Faso|14.000|10.500|13.91|15.05|<br>2.70|
|44.|<br>Botswana|17.640|11.900|23.81|18.80|<br>0.32|
|45.|<br>Burundi|12.070|5.000|13.19|15.81|15.89|
|46.|<br>Ethiopia|8.590|3.100|14.35|20.25|18.59|
|47.|<br>Kenya|20.770|7.000|20.41|11.91|<br>0.42|
|48.|<br>Lesotho|23.420|13.500|25.71|13.24|<br>1.46|
|49.|<br>Malawi|15.830|7.900|15.18|8.89|0.00|
|50.|<br>Mauritius|13.080|6.200|19.82|10.65|<br>5.22|
|51.|<br>Rwanda|13.150|13.300|10.24|12.09|15.71|
|52.|<br>Somalia|26.260|3.900|15.04|25.79|<br>1.91|
|53.|<br>Sudan|15.080|4.800|13.64|26.02|<br>5.46|
|54.|<br>Swaziland|16.500|4.200|33.70|17.37|<br>6.01|
|55.|<br>Zaire|22.740|0.500|18.94|10.36|14.67|
|56.|<br>Zambia|19.550|0.100|23.66|4.95|0.00|
- 47 -

# Table A.1: (Continued)

# 1965-73

||Country|Pers.<br>Tax|Corp.<br>Tax|Sales<br>Tax|Tax<br>Growth|Inflation|
|---|---|---|---|---|---|---|
|1.|<br>Benin|2.55|<br>1.90|<br>4.01|<br>10.20|<br>3.50|
|2.|<br>Cameroon|6.08|<br>2.26|<br>5.46|<br>4.60|<br>5.44|
|3.|<br>Chad|5.39|<br>2.13|<br>6.26|<br>2.70|<br>4.67|
|4.|<br>Congo|5.11|<br>3.78|<br>9.24|<br>3.30|<br>5.26|
|5.|<br>Gabon|3.92|<br>2.93|<br>4.43|<br>8.60|<br>6.18|
|6.|<br>Gambia|2.66|<br>1.84|<br>1.10|<br>6.20|<br>2.24|
|7.|<br>Ghana|4.80|<br>5.60|13.49|-4.30|<br>8.43|
|8.|C6te d'Ivoire|5.10|<br>2.09|12.06|<br>7.90|<br>4.25|
|9.|<br>Liberia|5.92|<br>6.31|<br>5.07|<br>6.90|<br>1.70|
|10.|<br>Mali|2.49|<br>2.53|11.48|<br>3.20|<br>6.74|
|11.|<br>Nigeria|0.14|<br>13.83|<br>6.89|<br>23.10|<br>8.61|
|12.|<br>Senegal|4.88|<br>1.79|<br>8.17|<br>0.30|<br>3.01|
|13.|Sierra Leone|5.34|<br>8.31|<br>4.58|<br>7.50|<br>2.22|
|14.|Burkina Faso|10.91|<br>1.34|<br>5.29|<br>4.00|<br>2.40|
|15.|<br>Botswana|0.00|<br>0.00|<br>1.05|29.80|<br>5.00|
|16.|<br>Burundi|5.18|<br>5.84|<br>8.96|<br>8.90|<br>2.78|
|17.|<br>Ethiopia|5.07|<br>4.47|<br>11.40|<br>6.10|<br>1.68|
|18.|<br>Kenya|0.74|<br>12.23|<br>7.80|10.70|<br>2.63|
|19.|<br>Lesotho|8.51|<br>2.82|<br>1.26|20.60|<br>4.72|
|20.|Madagascar|4.61|<br>3.67|12.64|<br>4.10|<br>4.26|
|21.|<br>Malawi|8.72|<br>7.79|<br>5.72|12.20|<br>4.12|
|22.|<br>Mauritius|8.39|<br>2.73|<br>6.92|<br>-0.50|<br>6.04|
|23.|<br>Rwanda|5.15|<br>5.94|<br>6.24|<br>3.80|<br>9.97|
|24.|<br>Somalia|5.71|<br>0.02|<br>12.04|<br>6.70|<br>3.o6|
|25.|<br>Sudan|2.30|<br>6.56|22.42|<br>2.40|<br>7.35|
|26.|<br>Swaziland|5.24|<br>4.66|<br>1.18|<br>17.20|<br>4.31|
|27.|<br>Zaire|9.04|<br>7.00|<br>4.02|7.10|17.14|
> - 48 -

Table A.1: (Continued) 19,. -82

||Country|Pers.<br>Tax|Corp.<br>Tax|Sales<br>Tax|<br>Tax<br>Growth|Inflation<br>|
|---|---|---|---|---|---|---|
|28.|<br>Benin|3.18|<br>3.62|<br>3.72|<br>6.60|<br>10.87|
|29.|<br>Cameroon|8.77|<br>4.75|<br>8.40|<br>9.80|<br>11.18|
|30.|<br>Chad|4.79|<br>2.53|<br>3.58|<br>0.10|<br>7.55|
|31.|<br>The Congo|5.82|<br>10.71|<br>7.05|<br>0.80|<br>11.86|
|32.|<br>Gambia|3.78|<br>2.21|<br>0.91|<br>9.40|<br>10.43|
|33.|<br>Ghana|4.16|<br>4.84|<br>11.43|-9.90|39.46|
|34.|<br>Guinea|3.69|14.84|<br>4.09|<br>13.10|<br>4.17|
|35.|C6te d'Ivoir|e 4.95|<br>3.18|<br>9.37|<br>5.20|10.68|
|36.|<br>Liberia|14.41|<br>6.09|<br>6.67|<br>3.80|<br>7.00|
|37.|<br>Mali|2.96|<br>7.57|<br>9.47|<br>8.10|<br>10.46|
|38.|Mauritania|10.29|<br>1.77|<br>5.80|<br>7.80|<br>8.72|
|39.|<br>Niger|4.45|<br>10.17|<br>6.72|<br>14.40|11.64|
|40.|Nigeria|0.21|48.07|<br>2.13|<br>10.80|11.20|
|41.|<br>Senegal|5.36|<br>3.25|<br>7.41|<br>2.70|<br>7.48|
|42.|Sierra Leone|7.02|<br>11.11|<br>7.59|<br>-1.00|13.27|
|43.|Burkina Faso|5.36|<br>2.00|<br>5.23|<br>5.20|10.11|
|44.|<br>Botswana|0.00|<br>0.00|<br>0.57|<br>12.70|12.90|
|45.|<br>Burundi|4.94|<br>6.98|11.64|<br>5.10|<br>12.63|
|46.|<br>Ethiopia|5.18|<br>8.03|<br>13.00|<br>7.10|<br>3.86|
|47.|<br>Kenya|4.73|<br>10.77|15.16|<br>8.80|<br>10.21|
|48.|<br>Lesotho|9.78|<br>6.01|<br>0.85|<br>5.10|<br>11.84|
|49.|<br>Malawi|7.81|11.72|<br>9.32|<br>7.80|<br>9.80|
|50.|<br>Mauritius|9.77|<br>3.46|<br>4.72|<br>6.00|10.32|
|51.|<br>Rwanda|2.68|<br>3.74|<br>4.56|<br>8.60|<br>11.02|
|52.|<br>Somalia|3.77|<br>0.54|<br>8.33|<br>8.40|<br>12.29|
|53.|<br>Sudan|2.58|<br>7.56|14.71|<br>3.30|15.34|
|54.|<br>Swaziland|6.84|<br>4.96|<br>1.13|<br>5.80|<br>12.85|
|55.|<br>Zaire|13.53|<br>7.00|<br>5.66|<br>-5.70|38.24|
|56.|<br>Zambia|9.84|<br>8.20|<br>17.57|<br>1.50|<br>7.40|
||PPR|Working Paper Series|||
|---|---|---|---|---|
||Title|Author|Date|Contact|
|WPS36|Means and Implications<br>of Social<br>Security Finance in Developing||||
||Countrles|Douglas J. Puffert|August 1988|R. Blade-Charest<br>33754|
|WPS37|Black Market Premia, Exchange Rate<br>Unification<br>and Inflation In<br>Sub-Saharan<br>Africa|Brian Pinto|July 1988|R. Blade-Charest<br>33754|
|WPS38|<br>Intergovernmental<br>Grants In<br>Developing<br>Countries|Larry Schroeder|||
|WPS39|Fiscal Policy In Low-income<br>Africa|Stephen A. O'Connell|<br>July 1988|R. Blade-Charest<br>33754|
|WPS40|Financial Deregulation<br>and the||||
||Globalization<br>of Capital Markets|Eugene L. Versluysen|August 1988|R. Blade-Charest<br>33754|
|WPS41|Urban Property Taxation in<br>Developing<br>Countries|William Dillinger|August 1988|R. Blade-Charest<br>33754|
|WPS42|Government<br>Pay and Employment<br>Policies<br>and Government<br>Performance in||||
||Developing<br>Economies|David L. Lindauer|August 1988|R. Blade-Cha-est<br>33754|
|WPS43|Tax Administration<br>in Developing<br>Countries: Strategies<br>and Tools||||
||rf Implementation|Tax Administration<br>Division|||
|WPS44|The Size and Growth of Government<br>Expenditures|David L. Lindauer|||
|WPS45-<br>WPS60|Assigned to WDR||||
|WPS61|Student Performance<br>and Schools Costs<br>in the Philippines'<br>High Schools|Emmanuel Jimenez<br>Vicente Paqueo<br>Ma. lourdes de Vera|August 1988|T. Hawkins<br>33678|
|WPS62|Status of Universities in the Arab<br>Countries of the Middle East and<br>North Africa|George 1. Za'rour|||
PPR Working Paper Series

|Title|Author|Date|Contact|
|---|---|---|---|
|WPS63 Does Japan Import Less Than It Should?|Kenji Takeuchi|July 1988|J.Epps<br>33710|
|WPS64 Cocoa and Coffee Pricing Policies<br>In Cote d lvoire|Takamasa Akiyama|August 1988|0. Gustafson<br>33714|
|WPS65 Interaction<br>of Infant Mortality and<br>Fertility and the Effectiveness<br>of<br>Health and Family Planning Programs|Howard Barnum|July 1988|S. Ainsworth<br>31091|
|WPS66 Slowing the Stork: Better Health for<br>Women through Family Planning|Anthony R. Measham<br>Roger W. Rochat|July 1988|A. Manciano<br>3,3226|
|WPS67 Price and Tax Policy for Semi-<br>Subsistence<br>Agriculture in Ethiopia|Robart D. Weaver<br>Sa?d Ali Shire|August 1988|0. Gustafson<br>33714|
|WPS68 A Comparison of Lamps for Domestic<br>Lighting In Developing Countries|Robert van der Plas|||
|WPS69 Does Local Financing Make Public<br>Primary Schools More Efficient?||||
|The Philippine<br>Case|Emmanual Jimenez<br>Vicente Paqueo<br>Ma. Lourdes de Vera|August 1988|T. Hawkins<br>33678|
|WPS70 Vocational<br>Education and Economic<br>Environments: Conflict or||||
|Convergence?|Arvil V. Adams<br>Antoine Schwartz|August 1988|T. Hawkins<br>33678|
|WPS71 School Effects on Student Achievement<br>in Nigeria and Swaziland|Marlaine Lockheed<br>Andre Komenan|August 1988|T. Hawkins<br>33678|
|WPS72 The Relative Efficiency<br>of Public<br>Schools in Developing Countries|Emmanuel Jimenez<br>Marlaine Lockheed<br>Vicente Paqueo|August 1988|T. Hawkins<br>33678|
|WPS73 Taxation and Output Growth in Africa|Jonathan Skinner|August 1988|A. BhalIa<br>60359|