Mohsin Khan, Morris Goldstein, and Vittorio Corbo
Published Date:
September 1987
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Gerhard Boehmer

In view of the short time, I will confine my remarks to only two points. One remark has been prompted by the support that Mr. Okongwu gave to Mr. Chelliah’s argument for a mixed economy. Mr. Chelliah in his paper argues that the involvement of the public sector in productive enterprises should be necessary in order to provide essential goods to the poorest sections of the society. Yesterday Mr. Saracoglu also mentioned another reason for the involvement of the public sector in productive enterprises, as he called it, the locomotive function. That was certainly a deliberate political intention of the Turkish Government when, in the early 1930s, Turkey decided to go the path of modernization and industrialization. I have some doubt if either of these two purposes can be served well through public institutions.

For income distribution and services to the poorer segments of the population, there are, I think, other more efficient mechanisms available. If a country lacks private entrepreneurship, as was the case in Turkey in the early 1930s, I doubt if that lack can effectively be replaced by the public sector.

In most low-income countries another important constraint on the government’s involvement in productive enterprises is, in my view, the scarcity of managerial and technical skills. If the public sector is constrained by lack of human capital, then the state should concentrate on the most important public services, which are to maintain public order and to provide the physical and social infrastructure on which the economy can build. If the public sector can perform these core functions effectively, it already makes a critical contribution to development.

My second point is on the revenue side of financial policies and on taxation. For the purposes of a stabilization program that needs to be executed in a comparatively short time, I think restructuring the tax system cannot contribute very much because it takes too much time to produce its effect. But for a program of structural change that aims at liberalization of an economic system, one must look at the tax system in order to remove distortions and possible disincentives to savings and investment.

I am not quite sure whether the liberalization of an economy requires a higher or lower total level of taxation. On the one hand, a reduction in the size of the public service sector, the withdrawal of the government from economic activities, or the shift to user fees for public services may allow a lower level of taxation. On the other hand, an increased reliance on markets may result in a more uneven distribution of income and the need for more redistribution through public budgets in order to protect the lower-income groups. Whatever the answer may be to this question, it will be important to remove from the tax system any bias against private and corporate savings.

The other issue is that of indirect taxation. Highly selective commodity taxes tend to create inefficiencies in the allocation of resources both on the consumption side and on the production side. So I would agree that it is necessary not to overburden a tax structure with distributional objectives, but rather aim at a uniform structure of indirect taxation.

This is not only advisable on grounds of economic efficiency but also because of administrative simplicity and, most of all in my view, for political reasons. Any attempt to differentiate tax rates either for reasons of income distribution or in order to exploit elasticities of demand and supply is bound to be subject to political power play among interest groups in a country, and the result may very well reflect the strengths of pressure groups but not necessarily economic wisdom.

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