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Informality, Development, and the Business Cycle in North Africa
North African economies are characterized by a significant share of informal activity and employment. About two-thirds of workers in North Africa operate without any formal arrangement and social protection, and about 30 percent of GDP is estimated to be produced by informal workers and firms. This paper finds that while a few key structural characteristics could explain “normal” informality in North Africa, policy distortions explain a large share of excess informality. Among the structural factors that can lead to high informality, the relatively lower level of human capital and younger population help explain the high informality in the region, as low-skilled and young people generall...
Revenue Mobilization for a Resilient and Inclusive Recovery in the Middle East and Central Asia
Domestic revenue mobilization has been a longstanding challenge for countries in the Middle East and Central Asia. Insufficient revenue has often constrained priority social and infrastructure spending, reducing countries’ ability to reach the Sustainable Development Goals, improve growth prospects, and address climate related challenges. Moreover, revenue shortfalls have often been compensated by large and sustained debt accumulation, raising vulnerabilities in some countries, and limiting fiscal space to address future shocks. The COVID-19 pandemic and the war in Ukraine have compounded challenges to sustainable public finances, underscoring the need for revenue mobilization efforts. The...
The Determinants of Banks' Liquidity Buffers in Central America
Banks’ liquidity holdings are comfortably above legal or prudential requirements in most Central American countries. While good for financial stability, high systemic liquidity may nonetheless hinder monetary policy transmission and financial markets development. Using a panel of about 100 commercial banks from the region, we find that the demand for precautionary liquidity buffers is associated with measures of bank size, profitability, capitalization, and financial development. Deposit dollarization is also associated with higher liquidity, reinforcing the monetary policy and market development challenges in highly dollarized economies. Improvements in supervision and measures to promote dedollarization, including developing local currency capital markets, would help enhance financial systems’ efficiency and promote intermediation in the region.
Foreign Aid and Revenue
This paper reexamines the relationship between aid and domestic tax revenues using a more recent and comprehensive dataset covering 118 countries for the period 1980 - 2009. Overall, our results support earlier findings of a negative association between net Official Development Assistance (ODA) and domestic tax revenues, but this relationship appears to have weakened in reflection of greater efforts at mobilizing domestic revenues in many countries. The composition of net ODA matters: ODA grants are associated with lower revenues, while ODA loans are not. The paper further finds that net ODA and grants are negatively associated with VAT, excise and income tax revenues, but have a positive relationship with trade taxes. Aid has a particularly strong negative effect on domestic tax revenues in low-income countries and in countries with relatively weak institutions.
Inequality in Good and Bad Times: A Cross-Country Approach
This paper provides evidence of a strong relationship between the short-term dynamics of growth and inequality in developing economies. We find that reductions in inequality during growth upswings are largely reversed during growth slowdowns. Using a new methodology (mediation analysis), we identify unemployment, and youth unemployment especially, as the main channel through which fluctuations in growth affect future dynamics in inequality. These findings suggest that both the quality of jobs created and labor market policies are important to ensure that growth outcomes are conducive to inequality reduction.
Expenditure Rules
This paper provides new evidence on the effectiveness of expenditure rules. The analysis is based on a unique dataset covering all countries with national and supranational fiscal rules, including 33 expenditure rules, between 1985 and 2013. It contributes to the existing literature on fiscal rules in two main ways. First, it is the most comprehensive assessment of compliance with rules and of the potential role of expenditure rules, in particular regarding long-term sustainability. Second, it analyzes whether expenditure rules are associated with changes in public investment and its efficiency.
Fiscal Sustainability, Public Investment, and Growth in Natural Resource-Rich, Low-Income Countries
This paper assesses the implications of the use of oil revenue for public investment on growth and fiscal sustainability in Cameroon. We develop a dynamic stochastic general equilibrium model to analyze the effects of such investment on growth and on the path of key fiscal indicators, such as the non-oil primary deficit and public debt. Policy scenarios show that Cameroon’s large infrastructural needs and relatively low current debt levels could justify a temporary deviation from traditional policy advice that suggests saving part of the oil revenue to smooth expenditure over time. Model simulations show that a relatively high degree of efficiency of public investment is needed for scaled-up public investment to make a significant contribution to growth, while maintaining fiscal sustainability.
Progress of the Personal Income Tax in Emerging and Developing Countries
Personal Income Tax (PIT) is one of the key sources of revenues in Advanced Economies (AEs) but plays a much more limited role in Low-Income Developing Countries (LIDCs) and Emerging Market Economies (EMEs), both in terms of revenue and redistributive impact. Notwithstanding, this paper shows that LIDCs and EMEs increased their PIT-to-GDP revenue by 110 and 48 percent, respectively, during the 1990-2019 period, a marked improvement in the PIT revenue performance. We find that this rise was driven primarily by economic developments and to a lesser extent by changes in the design of PIT systems. We also find that LIDCs that improved their tax-to-GDP ratios relied on a broader set of tax instruments and not exclusively on the PIT, suggesting that a successful revenue mobilization strategy of developing countries requires a comprehensive approach covering a wider range of taxes. Finally, using a newly assembled dataset of PIT characteristics of 157 countries over the 2006-2018 period, we estimate a novel redistribution index of the PIT in LIDCs. We show that the contribution of the PIT to inequality reductions has been significant.
Causes and Consequences of Income Inequality
This paper analyzes the extent of income inequality from a global perspective, its drivers, and what to do about it. The drivers of inequality vary widely amongst countries, with some common drivers being the skill premium associated with technical change and globalization, weakening protection for labor, and lack of financial inclusion in developing countries. We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the top 20 percent results in lower growth—that is, when the rich get richer, benefits do not trickle down. This suggests that policies need to be country specific but should focus on raising the income share of the poor, and ensuring there is no hollowing out of the middle class. To tackle inequality, financial inclusion is imperative in emerging and developing countries while in advanced economies, policies should focus on raising human capital and skills and making tax systems more progressive.
On the Capacity to Absorb Public Investment: How Much is Too Much?
While expanding public investment can help filling infrastructure bottlenecks, scaling up too much and too fast often leads to inefficient outcomes. This paper rationalizes this outcome looking at the association between cost inflation and public investment in a large sample of road construction projects in developing countries. Consistent with the presence of absorptive capacity constraints, our results show a non-linear U-shaped relationship between public investment and project costs. Unit costs increase once public investment is close to 10% of GDP. This threshold is lower (about 7% of GDP) in countries with low investment efficiency and, in general, the effect of investment scaling up on costs is especially strong during investment booms.
