Transcript Comments on Latin American Outlook 2009: Fiscal Policy and

Comments on Latin American
Outlook 2009: Fiscal Policy and
Development
William Maloney
Office of the Chief Economist for Latin America
World 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.
AUSTRIA
NETHERLANDS
FRANCE
LUXEMBOURG
SWEDEN
GERMANY
BELGIUM
US
SPAIN
EURO 15
ITALY
GREECE
FINLAND
DENMARK
UK
CANADA
AUSTRIA
NETHERLANDS
0.2
FRANCE
0.2
LUXEMBOURG
0.25
SWEDEN
0.25
GERMANY
0.3
BELGIUM
0.3
US
0.35
SPAIN
0.35
EURO 15
0.4
ITALY
0.4
GREECE
0.45
FINLAND
0.45
DENMARK
0.5
PORTUGAL
0.5
UK
0.55
CANADA
0.55
LAC
0.6
IRELAND
0.6
LAC
Gini disposable incomes
IRELAND
Gini market Incomes
PORTUGAL

Perry et. al (2006)


LAC tax collections are below similar countries.
LAC public expenditures are neutral or regressive.
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
Recent Growth and Forecasts for 2009
annual GDP real growth rate, in %
10
2006
9
2007
2008
2009
8
7
6.2
6
5
4
3
2
2.7
2.6
2.5
1.6
1.8
1
1.0
0.0
0
-0.6
-1
-0.5
0.0
-1.0
-2
-2.7
-3
-3.3
-4
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Sources: Consensus Forecasts (as of February 09), ECLAC and World Bank. LAC growth range is based on LCRCE Estimations
LAC
Keeping fiscal spending from falling
may be hard to achieve in 2009
Primary Balance in the LAC region
as % of GDP
4.5
Central America & Caribbean
LAC 7
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
2009F
2008E
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Source: EIU
1995
0.0
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?


Lead to exit and a “culture
of informality”
Symptom of a
dysfunctional” social
contract?
PAR
.1
BRA
NIC
HON
ARG
COL
0
Ex: tax morale is negatively
correlated to perceptions of
State capture
SAL GUA
CHI
MEX
URU
-.1

COS
VEN
PAN
ECU
BOL
PER
-.2

Collective perceptions of
fairness/efficacy of state
Strong reciprocity: I’ll
comply if others comply
Tax Morale

.2
“Social Norms” of Compliance:
Perceptions of State, of Each Other
-.2
-.1
0
Run By a Few Interest
coef = -.80478831, se = .24120409, t = -3.34
.1
.2
New surveys: workers tell us of both
exit and exclusion
odds ratio
Self-rated Poverty Relative to Formal Workers
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Independent
Argentina
Source: (Arias 2007)
Informal
Salaried
Dominican Republic
.18
And their transitions often suggest
voluntary entry
.07
Mexico
.1
.12
.14
Self-Employed to Formal
.06
.05
.04
Self Employment to Formal Salaried
1987q1
1991q1
1995q1
Formal to Self-Employment
Source: Bosch and Maloney (2007)
.08
.03
.16
Formal Salaried to Self Employment
1999q1
2003q1
Self-Employed to Formal
Why don’t informal value their state?
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

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
Why do microfirms not register?
38
Argentina
63
84
Mexico
14
63
Dominican
Republic
27
0
20
40
60
80
No need to register/business is too small
Formality costs
100
However, in the end, these may be
second order considerations
Self Employment (% of Labor Force) 2/
Lack of Pensions (% Labor Force) 1/
2 Measures of Informality vs Income per Capita
100
90
80
70
60
50
40
30
20
10
0
-
10,000
20,000
30,000
40,000
60
50
40
30
20
10
0
-
10,000
Advanced Countries
40,000
30,000
2005 GDP per capita PPP adjusted
2005 GDP per capita PPP adjusted
Latin America
20,000
Rest of the world
Latin America
Advanced Countries
Rest of the world
Complementary Bedside Reading
Informality: Exit
and Exclusion
Perry et. al (2007)
Chief Economist Office for Latin America
and the Caribbean
End