The World Bank Economic Review

Fallon, Peter, R.;Lucas, Robert E., B.

doi: 10.1093/wber/5.3.395pmid: N/A

Abstract Employment laws in India and Zimbabwe require employers to obtain permission from the government to retrench or lay off workers. The effect of these laws on the demand for employees in 64 manufacturing industries is examined using time series data. Little evidence is found indicating slower adjustments in employment levels and hence retardation in any structural adjustment following the new laws. However, in both countries a substantial decline in the demand for employees (other things equal) followed the new legislation. In Zimbabwe it is difficult to be precise about a causal connection between the drop in the demand for labor (allowing for concurrent increased wages) and the new legislation because enactment occurred simultaneously with Independence; however, the current economic climate induced high levels of investment in capital but not investments in long-term commitments to employees. But in India further evidence supports a causal connection: larger establishments covered by the job security regulations tended to experience a decline in the demand for labor while smaller, uncovered enterprises in the same industries did not; moreover the decline in demand for employees across industries in India was larger where the private sector predominates, where larger establishments covered by the new laws are important, and where a smaller proportion of employees are union members. Thus in both countries the policy implemented to protect jobs may have resulted in far fewer jobs. This content is only available as a PDF. Author notes Peter R. Fallon is in the Africa-Sahelian Department of the World Bank and Robert E. B. Lucas is in the Economics Department of Boston University. The authors are grateful for helpful comments received from three referees. © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK

Calle, Luis F., de la

doi: 10.1093/wber/5.3.415pmid: N/A

Abstract This article tests the arbitrage pricing theory in the context of the unstable macroeconomic years in Mexico, 1977–87. Using information on returns on assets available to domestic investors—primarily stocks traded at the local stock exchange—an attempt is made to ascertain the extent to which these assets have offered premia for a set of proposed sources of risk. The pervasive factors that play an important role in asset pricing in Mexico are unexpected inflation, unexpected money growth, innovations in the Standard & Poor's 500 price series, and innovations in the dollar oil price. A residual market factor is obtained, using the McElroy and Burmeister model. Given that these risks get premia over and above the riskless rate, expected rates of return in Mexico have been higher during the years of erratic macroeconomic conditions. Mexico is not considered to be well integrated with the international capital markets because local sources of risk—such as inflation—are not priced in the United States, whereas international sources of uncertainty—such as oil price shocks—are priced locally but not in the United States. This content is only available as a PDF. Author notes Luis F. de la Calle is with the Country Department IV of the Europe, Middle East, and North Africa Regional Office at the World Bank. This article draws on parts of the author's doctoral dissertation at the University of Virginia. He would like to thank Edwin Burmeister and Wake Epps for their help and encouragement and an anonymous referee for useful comments. © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK

Wijnbergen, Sweder, van

doi: 10.1093/wber/5.3.437pmid: N/A

Abstract Could external restraint and internal balance in Mexico have been reconciled at levels of savings and investment that allowed satisfactory growth in output without the 1989–90 restructuring of debt? What are the likely implications of Mexico's “Brady deal” on economic growth? What are the macroeconomic effects of debt-equity swaps? This article develops and estimates a model to address these issues. The analysis concludes that the 1989–90 agreement in Mexico will contribute materially to macroeconomic stability and the restoration of economic growth. This content is only available as a PDF. Author notes " Sweder van Wijnbergen is lead economist for Mexico in the Latin America and the Caribbean Regional Office at the World Bank. The author thanks Sergio Pena, Marcelo Selowsky, and seminar participants at Harvard, the Massachusetts Institute of Technology, and the World Bank for helpful comments. © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK

Khalilzadeh-Shirazi,, Javad;Shah,, Anwar

doi: 10.1093/wber/5.3.459pmid: N/A

Article PDF first page preview Close This content is only available as a PDF. Author notes Javad Khalilzadeh-Shirazi is with the Asia Country Department IV and Anwar Shah with the Country Economics Department, both at the World Bank. © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK

Shah,, Anwar;Slemrod,, Joel

doi: 10.1093/wber/5.3.473pmid: N/A

Abstract The tax sensitivity of foreign direct investment (FDI) has important policy implications. If FDI is not responsive to taxation, then it may be an appropriate target for taxation by the host country. This question is examined for Mexico by estimating the response of FDI from retained earnings and transfers from abroad to the tax regimes in Mexico and the home country, the credit status of multinationals, country risk factors, and regulatory and trade regimes in Mexico. FDI in Mexico is found to be sensitive to the tax regimes in Mexico and the United States, the credit status of multinationals, country credit ratings, and the regulatory environment. Thus Mexico's current policies to dismantle regulations and employ a tax system competitive with the United States are expected to have salutory effects on FDI in Mexico. This content is only available as a PDF. Author notes Anwar Shah is with the Country Economics Department of the World Bank, and Joel Slemrod is professor of economics and the director of the Office of Tax Policy Research of the University of Michigan, Ann Arbor. © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK

Skinner,, Jonathan

doi: 10.1093/wber/5.3.493pmid: N/A

Abstract Countries that collect tax revenue from the agricultural sector through export taxes, marketing boards, and overvalued domestic currencies are often loath to abandon these distorting policies because of the consequent revenue loss. One potential alternative is to replace these distortionary taxes with a land tax, which would not depress output prices or discourage foreign exchange earnings and which could be, in theory, a highly progressive tax. The advantages and disadvantages of a land tax are examined theoretically and using the specific experiences of Bangladesh, Argentina, and Uruguay. It is concluded that the land tax is not necessarily more efficient than other types of taxes; the Achilles Heel of land taxation is administration; progressive tax rates based on land holdings are nearly impossible to administer; land taxes have been ineffective at promoting nonrevenue goals; political support by farmers is necessary to implement the tax; and the most promising prospects for a moderate land tax system are in financing local, rather than central, government expenditures. This content is only available as a PDF. Author notes Jonathan Skinner is at the University of Virginia, Charlottesville, and the National Bureau of Economic Research, Cambridge, Mass. The author is most indebted to Pradeep Mitra for encouragement and helpful discussions. He is also grateful to Bela Balassa, Karl Case, Lovell S. Jarvis, Sarfraz Qureshi, Jay Rosengarth, Paul Trapido, three anonymous referees, and participants at the World Bank Conference on Tax Policy in Developing Countries (March 28–30, 1990) for helpful comments and suggestions. He thanks Nicholas Stern and numerous Bangladesh tax officials for their assistance with the survey data from the World Bank Tax Mission to Bangladesh in December 1986. A longer version of this paper appears in J. Khalilzadeh-Sharazi and A. Shah, eds., Tax Policy in Developing Countries (Washington, D.C.: World Bank, forthcoming). © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK

Chamley,, Christophe

doi: 10.1093/wber/5.3.513pmid: N/A

Abstract In developing countries most of the financial assets are deposits at commercial banks. This article focuses on the implicit taxation of financial assets through seigniorage, reserve requirements, lending targets, and interest ceilings combined with inflation. The impact of taxation on financial deepening increases significantly with the tax rate, as shown by cross-sectional and time series data for selected countries in Sub-Saharan Africa and Southeast Asia. The problem of measuring revenue is examined, and the efficiency cost of taxation is analyzed in a Harberger framework. Although taxes on financial assets have a low administrative cost, the excess burden caused by the misallocation of resources is probably a much higher fraction of revenues than that of other taxes. This content is only available as a PDF. Author notes Christophe Chamley is with the Department of Economics at Boston University. Stimulating comments by Sheetal Chand, Javad Khalilzadeh-Shirazi, and Bela Balassa are gratefully acknowledged. © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK

Shah,, Anwar;Whalley,, John

doi: 10.1093/wber/5.3.535pmid: N/A

Abstract Misleading conclusions can be drawn from studies of tax incidence that ignore the special features of developing countries. Incorporating these features can sometimes reverse the incidence pattern of taxes relative to what is often taken to be conventional wisdom. Even where patterns are not reversed, quantitative differences can be substantial. The “newer” views of incidence have implications for tax restructuring options being considered in several developing countries. The proposed restructuring may appear to lead only to a more regressive tax system because of improper incidence analysis. This content is only available as a PDF. Author notes " Anwar Shah is with the Country Economics Department at the World Bank, and John Whalley is with the Department of Economics at the University of Western Ontario, London. Earlier versions of this paper were presented at a seminar at the World Bank in July 1989 and the World Bank Conference on Tax Policy in Developing Countries in March 1990. The authors are grateful for the comments of Richard Bird, Javad Khalilzadeh-Shirazi, Charles McLure, Richard Musgrave, Nicholas Stern, and the anonymous referees of this article. © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK

Dahl,, Henrik;Mitra,, Pradeep

doi: 10.1093/wber/5.3.553pmid: N/A

Abstract Three examples from the World Bank's country economic work show how models can complement general principles in guiding the design of a tax reform package. The Bangladesh model highlights the sensitivity of judgments about desirable tax bases to assumptions about the labor market and substitutability in production. The China model quantifies the losses from recommending a single rate value added tax when prices are controlled and public capital is freely provided to state enterprises. The India model shows what fiscal adjustment is consistent with tariff reductions undertaken to promote an outward-oriented development strategy. Most of the costs of constructing tax policy models are related to the need to establish a consistent data set and to calibrate the model in a way that allows its behavior to be consistent with what good economic analysis would lead one to expect. This content is only available as a PDF. Author notes Henrik Dahl is with Simcorp, Copenhagen, and Pradeep Mitra is lead economist in Country Department 1, Asia Region, of the World Bank. © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK

doi: 10.1093/wber/5.3.575pmid: N/A

Article PDF first page preview Close This content is only available as a PDF. © 1991 The International Bank for Reconstruction and Development / THE WORLD BANK