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Feng Wei and Jean-François Wen
Presumptive income taxes in the form of a tax on turnover for SMEs are pervasive as a way to reduce the costs of compliance and administration. We analyze a model where entrepreneurs allocate labor to the formal and informal sectors. Formal sector income is subjected either to a corporate income tax or a tax on turnover, depending on whether their turnover exceeds a threshold. We characterize the private sector equilibrium for any given configuration of tax policy parameters (corporate income tax rate, turnover tax rate, and threshold). Given private behavior, social welfare is optimized. We interpret the first-order conditions for welfare maximization to identify the key margins and then simulate a calibrated version of the model.
Mr. Tetsuya Konuki and Mr. Mauricio Villafuerte
Excessively procyclical fiscal policy can be harmful. This paper investigates to what extent the fiscal policies of sub-Saharan African countries were procyclical in recent years and the reasons for the degree of fiscal procyclicality among these countries. It finds that a tendency for procyclical fiscal policy was particularly pronounced among oil exporters and after the global financial crisis. It also finds a statistically significant causal link running from deeper financial markets and higher reserves coverage to lower fiscal policy procyclicality. Fiscal rules supported by strong political commitment and institutions seem to be key to facilitating progress for deeper financial markets and stronger reserves coverage.
International Monetary Fund
The reform of the Fund’s policy on the use of conditionality on public external debt in Fund-supported programs (the “debt limits policy”) has been under discussion since March 2013. The discussion has taken place against a backdrop where lower income countries are seeking to boost growth through higher public investment levels, targeted in particular at large infrastructure gaps, while facing both a wider range of external financing opportunities and limits on the supply of traditional concessional financing. The reform of the Fund’s policy on debt conditionality in 2009 was a first step to accommodate these new realities: experience with the 2009 reforms has pointed to the need for more fundamental reforms to provide countries with greater flexibility to finance productive investments while containing risks to medium-term debt sustainability. The reforms proposed here build on the Board review of the debt limits policy in March 2013, ensuing informal Board discussions in January and May 2014, discussions at an informal seminar in September 2014, and various stakeholder consultations. In developing this reform proposal, staff has sought to first specify a robust set of principles to guide the use of public debt conditionality in all Fund arrangements and then examine how these principles should apply in the specific circumstances of countries that normally rely on official external concessional financing.
International Monetary Fund
This document updates the information provided in the September 2005 Heavily Indebted Poor Countries (HIPC) Initiative – Status of Implementation report. It deals exclusively with the enhanced HIPC Initiative, and does not consider the implications of the Multilateral Debt Relief Initiative (MDRI).
Mr. Ernesto Hernández-Catá
This paper argues that sub-Saharan Africa’s growth performance needs to be improved substantially in order to raise standards of living to an acceptable level and achieve a visible reduction in poverty. The paper provides a broad overview of the explanations for sub-Saharan Africa’s unsatisfactory growth performance in the past, paying particular attention to the empirical literature. It argues that growth has been hampered by economic distortions and institutional deficiencies that have increased the risk of investing in Africa, and lowered the rates of return on capital and labor as well as the growth of total factor productivity.
Mr. A. J Hamann
Do exchange-rate-based stabilizations generate distinctive economic dynamics? To address this question, this paper identifies stabilization episodes using criteria that differ from those in previous empirical studies of exchange-rate-based stabilizations. We find that, while some differences can be detected between exchange-rate-based stabilizations and stabilizations where the exchange rate is not the anchor, the behavior of important variables does not appear to differ—especially output growth, which is good in both cases. There is also no evidence that fiscal discipline is enhanced by adopting an exchange-rate anchor, or that there are any systematic differences in the success records of stabilizations that use the exchange rate as a nominal anchor and those that do not.
Mr. Patrick Honohan and Mr. Stephen A. O'Connell
In post-independence sub-Saharan Africa, institutional arrangements for monetary policy have taken a variety of forms, although the historical evolution of many African financial systems has been similar. This paper identifies five different regimes and examines how they evolved over time. It focuses on how the alternative institutional arrangements have influenced the performance of monetary policy under fiscal pressure, and concludes that, although the trend appears to be toward more flexible regimes, the transition to greater flexibility can exacerbate problems of credibility and of macroeconomic management.
Julio A. Santaella
This paper analyzes the initial conditions before Fund financial arrangements are adopted. Evidence from 324 Fund arrangements in 78 developing countries during 1973-91 indicates that there are important differences in the characteristics between program episodes and a control group. Program episodes exhibit weaker balance of payments, output growth, investment, external conditions and fiscal policy than the control group; they are also characterized by a higher degree of external indebtedness and inflation, and their exchange rates are more depreciated in both nominal and real terms. Only in the case of the growth rates of money and credit do the two groups appear to be statistically similar.