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)| false Tanzi, Vito, Mario I. Blejer, and Mario O. Teijeiro, 1993, “ Effects of Inflation on Measurement of Fiscal Deficits: Conventional versus Operational Measures,” in How to Measure the Fiscal Deficit, ed. by ( Mario I. Blejerand Adrienne Cheasty Washington: International Monetary Fund), pp. 175– 204.
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Terence Agbeyegbe is a Professor of economics at Hunter College, City University of New York. Janet Stotsky and Asegedech WoldeMariam are economists with the IMF. We would like to thank Randy Filer, Timothy Goodspeed, Kwabena Gyimah-Brempong, Sergio Leite, Winston Moore, Peter Pedroni, Tej Prakash, Emil Sunley, and the participants at the Economic Commission for Africa Ad-hoc Expert Group Meeting on Maintaining the Government Fiscal Base in the Context of a Trade Liberalization Regime, held in Addis Ababa, Ethiopia, September 2003, for useful suggestions, and Beulah David and Joaquin Salas Orono for helping prepare the paper. The usual disclaimer applies.
Bevan (1995), Feltenstein (1992), and Tokarick (1995) investigate the effect of exchange rate changes on the fiscal balance in an applied general equilibrium framework with application to specific countries.
If the real exchange rate were unchanged, then there would likely be little change in the share of import tax collections in GDP.
Ebrill et al (2001) report the share of VAT revenue derived from imports for 22 developing countries. More than 50 percent of the VAT revenue comes at importation stage in most of the sample countries. (The highest in the sample is 70 percent.)
Practices vary, however. For instance, in some Commonwealth nations, excises apply only to domestic goods and they are not part of the base for broad-based sales taxes.
Stotsky and WoldeMariam (1997) provides a summary of the significant variables in the existing studies.
Adam et al (2001) construct the misalignment variable by estimating an equation for the long run or equilibrium exchange rate and then calculate deviations from this exchange rate as the degree of misalignment. See their study for details (pp. 190–191).
Since there is no ideal measure of trade liberalization, this study presents two measures for conceptual and practical reasons. A number of previous studies have attempted or have developed indicators of openness or trade restrictiveness and measures that summarize the overall stance of a country’s trade and exchange rate regime based on multi-year research projects. The appropriateness of these indicators depends on several factors and is discussed in Appendix I of IMF (1998) and the references therein. IMF (1998) develops a trade restrictiveness index that is based on a 10-point scale that combines measurements of the restrictiveness of tariffs and non-tariff barriers.
Although not focused on revenue issues, Greenaway, Morgan and Wright (2002), in their study of the relationship between trade liberalization and growth in developing countries, report results suggesting that problems of misspecification and the variation in the measures of liberalization are in part responsible for inconclusive results relating to the link between trade liberalization and growth.
We would like to thank Professor Christopher Adam for providing us with the data. The collected tariff and real effective exchange rate variables are derived from unpublished IMF African Department data and the IMF’s financial statistics database.
Although this paper does not provide an explicit theoretical model to underlie the empirical analysis, the theoretical model outlined in Adam et al (2001) can form such a basis.
The method of transformation of the data matrix can be in levels, first differences, orthogonal deviations, combinations of first differences (or orthogonal deviations) and levels, or in deviations from individual means. See Arellano and Honoré (2000) for details.
It has been suggested that the effect of our chosen explanatory variables on tax revenues may not be stable over time. While this might indeed be the case, our general conclusion that specification issues and different measures of trade liberalization lead to contrasting results is not affected by sub-sample analysis. Thus we have not reported the result of such analysis.
Empirical results herein were obtained by implementing the DPD package Version 1.2 of Doornik, Arellano and Bond (2001) which is a class of procedures in the programming language of Ox.
The results for the trade liberalization measure using the ratio of international trade revenues to international trade in percent are only different in a few respects from the results for the second measure. Since this measure is viewed as less accurate a proxy, we do not present the results. They are, however, available from the authors.
In addition to the lagged dependent variables, per capita income, inflation, government consumption, and openness are treated as potentially endogenous. For instruments we use their values dated at time t-2 The choice of instruments is not routine when the number of countries is small relative to the number of time periods. Soto (2003) discusses some issues associated with the choice of instruments.
The Sargan test is designed to test the overall validity of all the instruments, employed to estimate the model, by analyzing the sample analog of the moment conditions. It attempts to answer the question, given that a subset of instrumental variables is valid and exactly identifies the coefficients, are the extra instrumental variables valid? Failure to reject the null should be interpreted as favoring the specified model.