Public finance and development: five things to read in December

12 December 2017
Insight
Loans and repayment schedules Mumbai, India.

I end the year with a bumper crop of public finance reading; highlighting interesting reading on subjects ranging from the US tax cut and the ‘presource curse’, to digitalisation and November’s key stories.

Why the US tax cut is bad news for developing countries

The US economy is so big that changes to the US tax code have the potential to reverberate around the world. This can be positive; when the US unilaterally passed the Foreign Account Tax Compliance Act (FATCA), it became the basis of international standards obliging global financial companies to exchange information on accounts held abroad. Consequently, it is now significantly harder for firms to evade tax.

Unfortunately, the impacts of last month’s Senate approval of a far-reaching tax reform bill are likely to be negative. Corporate income tax is a key source of revenue for developing countries and the reduction of corporate tax rates from 35% to 20% is likely to further encourage the international ‘race to the bottom’. The unequal distribution of benefits that arises from the bill may be a blow to those championing the use of fiscal policy to address inequality.

The ’presource curse’

This month’s issue of Finance & Development has a good summary of James Cust and David Mihalyi’s aptly named paper on the ‘presource curse’. The paper shows how heightened expectations arising from the discovery of natural resources can lead to falling economic growth, even before production begins. The authors cite the example of an oil discovery in Ghana, where the jubilation triggered a rush of spending financed by $4.5 billion borrowed on international markets, whilst anticipated savings from oil revenues were just $484 million. The negative effects of the ‘presource curse’ tend to appear in countries where there are ineffective constraints on the executive. Cust and Mihalyi offer some pragmatic measures to mitigate the ‘curse’, like scaling back the optimism of forecasters, managing citizens’ expectations and improving scenario planning in fiscal policy offices. Addressing these problems, much like addressing those around the resource curse, will likely be easier said than done.

Digital revolutions (and realities?) in public finance

Last month saw the launch of a new IMF book on ‘digital revolutions in public finance’. The book clearly explains the potential opportunities and threats posed by digitalisation to fiscal policy. The authors suggest digital technologies will allow us ‘to do what we do now, but better’ – for example collecting and processing timely, and easily accessible, information on economic activity – and ‘before too long, even design fiscal policy in new ways’ – for example, linking taxation of individual income to life-time earnings, instead of annual earnings. It is less strong on explaining the persistent gap between the promise of digital technology and reality.

Understanding the drivers of inefficient investment

Improving the efficiency of investment has recently been a key preoccupation of international organisations. This has led to a spate of public investment management diagnostics. ODI’s paper Strengthening public investment management sets out how these diagnostics have evolved and questions whether they are necessarily evaluating the right things.

Among the most visible manifestations of inefficient public investment are projects that were started but did not finish. Martin J. Williams’s recent paper on unfinished local development projects in Ghana has, justifiably, been receiving a great deal of praise (he has written a useful summary). He shows how the intention to complete a project may exist when it begins but due to ‘the shifting and unpredictable nature of these local political bargains, the money that was intended to finish one project often gets spent to start another.’ The good news is that a relatively simple mechanism – whereby transfers are contingent on ‘existing projects being budgeted for before starting new ones’ – has the potential to overcome this problem and increase rates of project completion. It would be great to know whether the Ghanaian government intends to implement such a measure for its own government-funded projects.

Tax research has never been so popular

November saw a lot of new publications on taxation and development. A paper by Wilson Prichard and Mick Moore tackles a big question – how to increase revenues in low income countries – and offers an accessible summary of possible options. The Economist cites some new research on barriers to increasing property taxation in Myanmar, where tax to gross domestic product (GDP) ratios are among the lowest in the world. A study in Benin finds that where citizens expect politicians to favour their district (as a result of citizens’ voting preferences), they are more willing to pay tax. And a successful campaign to increase property tax collection in the Democratic Republic of Congo (DRC) led to increased citizen participation by both payers and evaders of tax in the treated districts. The inference drawn is that a successful campaign raises confidence in the state’s ability to deliver and with increased understanding of the state’s abilities come higher demands upon it.

That’s it until January. See you in the New Year.