comments on latin american outlook 2009: fiscal policy and development william maloney office of the...
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Comments on Latin American Outlook 2009: Fiscal Policy and Development
William MaloneyOffice of the Chief Economist for Latin AmericaWorld Bank
March 24 2009
Two Points The importance of Fiscal Policy to the
development process Informality, taxation and the Social Contract
The Role of the Fiscal Policy: Distribution Differences in inequality of market or
disposable incomes? A 50-50 story.
Perry et. al (2006)
LAC tax collections are below similar countries. LAC public expenditures are neutral or regressive.
Gini market Incomes Gini disposable incomes
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.55
0.6
LA
C
IRE
LA
ND
UK
CA
NA
DA
PO
RT
UG
AL
FIN
LA
ND
DE
NM
AR
K
ITA
LY
GR
EE
CE
EU
RO
15
US
SP
AIN
BE
LG
IUM
SW
ED
EN
GE
RM
AN
Y
FR
AN
CE
LU
XE
MB
OU
RG
NE
TH
ER
LA
ND
S
AU
ST
RIA
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.55
0.6
LA
C
IRE
LA
ND
UK
CA
NA
DA
POR
TU
GA
L
FIN
LA
ND
DE
NM
AR
K
ITA
LY
GR
EE
CE
EU
RO
15
US
SPA
IN
BE
LG
IUM
SWE
DE
N
GE
RM
AN
Y
FRA
NC
E
LU
XE
MB
OU
RG
NE
TH
ER
LA
ND
S
AU
STR
IA
Role of Fiscal Policy: Growth Yes, Infrastructure I’d add: Resolving market failures in knowledge
adoption and creation LAC is low in on TFP (productivity growth), patents,
R&D/GDP Suggests subsidies, tax incentives, direct gov’t investment
Issue: How design mechanisms such that governments do these things well? LAC is low on patents per unit of R&D, university quality
and collaboration etc.
In any case, crisis augurs badly for LR considerations of fiscal policy
Sources: Consensus Forecasts (as of February 09), ECLAC and World Bank. LAC growth range is based on LCRCE Estimations
Recent Growth and Forecasts for 2009annual GDP real growth rate, in %
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
Argentina Brazil Chile Colombia Mexico Peru LAC
2006 2007 2008 2009
-3.3
-0.6 -0.5 -1.0
-2.7
1.8
6.2
0.0
2.7
1.6
2.62.5
1.0
0.0
Keeping fiscal spending from falling may be hard to achieve in 2009
Source: EIU
Primary Balance in the LAC regionas % of GDP
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
E
2009
F
Central America & Caribbean LAC 7
Most spending calculations conjunctural: How can we preserve existing investment
projects? Infrastructure to boost demand vs. Transfers to adversly affected families?
2. Informality, taxation, the social contract Useful findings on taxes
Evasion only 30% of potential revenues Evasion by small firms not so important
Informality of the rich Real issue is distribution-tax base too small
Still, we know evasion, informality is high Focus on exit AND exclusion critical But why exit: Why don’t agents engage with the
state?
“Social Norms” of Compliance:Perceptions of State, of Each Other
Collective perceptions of fairness/efficacy of state
Strong reciprocity: I’ll comply if others comply Ex: tax morale is negatively
correlated to perceptions of State capture
Lead to exit and a “culture of informality”
Symptom of a dysfunctional” social contract?
VEN
COL
SAL
BRA
HON
GUA
COS
CHI
ARG
PAN
ECU
NIC
PAR
BOL
MEXURU
PER
-.2-.1
0.1
.2
Tax
Mor
ale
-.2 -.1 0 .1 .2
Run By a Few Interest
coef = -.80478831, se = .24120409, t = -3.34
New surveys: workers tell us of both exit and exclusion
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6o
dd
s r
ati
o
Independent InformalSalaried
Argentina Dominican Republic
Self-rated Poverty Relative to Formal Workers
Source: (Arias 2007)
And their transitions often suggest voluntary entry
.08
.1.1
2.1
4.1
6.1
8S
elf-
Em
ploy
ed
to F
orm
al
.03
.04
.05
.06
.07
For
ma
l to
Se
lf-E
mpl
oym
ent
1987q1 1991q1 1995q1 1999q1 2003q1
Formal to Self-Employment Self-Employed to Formal
Mexico
Self Employment to Formal Salaried
Formal Salaried to Self Employment
Source: Bosch and Maloney (2007)
Why don’t informal value their state?Why do microfirms not register? Small firms: DR, MX 60%-
and 80% say “they’re too small” or “they don’t need to formalize”
Suggests lack of need for existing services: design? quality?
Impact of tax reduction policies in MX, BR, Sri Lanka… small effect
27
14
63
63
84
38
0 20 40 60 80 100
DominicanRepublic
Mexico
Argentina
No need to register/business is too small
Formality costs
However, in the end, these may be second order considerations
0
10
20
30
40
50
60
70
80
90
100
- 10,000 20,000 30,000 40,000
Latin America Advanced Countries Rest of the world
Lac
k of
Pen
sions
(% L
abor
For
ce) 1
/
2005 GDP per capita PPP adjusted
2 Measures of Informality vs Income per Capita
0
10
20
30
40
50
60
- 10,000 20,000 30,000 40,000
Latin America Advanced Countries Rest of the world
Self
Em
ploy
men
t (%
of L
abor
For
ce) 2
/
2005 GDP per capita PPP adjusted
Informality: Exit and Exclusion
Perry et. al (2007)
Chief Economist Office for Latin America and the Caribbean
Complementary Bedside Reading