Research

Publications


Working Papers


We employ sectoral data to draw lessons on how structural reforms – implemented during the period 1975-2005 – affect cross-country aggregate labor productivity growth differences in developing countries. Most importantly, we explore how the effects of reforms on labor productivity growth are distributed between the intra-sectoral and inter-sectoral components of productivity growth. We find that most of the trade, product market, and financial sector reforms have increased labor productivity growth. Looking at the sub-components of labor productivity growth, the results show that structural reforms work mainly through the intra-allocative efficiency channel but not through the inter-allocative efficiency channel. The intra-sectoral component is the main driver of the impacts of reforms on labor productivity growth, with a contribution that ranges from 76 percent to 96 percent depending on the reform measure considered. We also examine the role of labor market regulations and find that labor market rigidity/flexibility determines how some reforms affect the inter-sectoral component. For example, the agriculture sector and current account reforms positively affect the inter-sectoral component when labor market regulations are flexible. In contrast, these same reforms negatively affect the inter-sectoral component when labor market regulations are too rigid.


Domestic revenue mobilization is an essential part of development financing. However, tax revenue represents on average less than 20 percent of GDP in African and Latin American countries. This paper sheds light on a new and important mechanism whereby firms internalize the losses stemming from the poor business environment and public policies ineffectiveness in their tax behavior. First, we use firm-level data in 30 African and Latin American countries to show that tax evasion and distortions stemming from the business environment are positively and significantly correlated while tax evasion and institutional quality are negatively and significantly correlated. Second, we develop a general equilibrium model where heterogeneous firms make tax evasion decisions based on their assessment of the quality of their business environment as well as the monitoring capacity of the tax agency. We simulate the model for each country in the African and Latin American sample and show that the model can explain 49% of the variation in tax evasion and more than 35% of the dispersion in output per worker across African and Latin American countries. Finally we run a series of counterfactual experiments. We show that, at the current level of deterrence, governments could decrease tax evasion by 21% by reducing distortions stemming from the business environment by half.