Despite pressing needs for spending on social services and public investment, most developing countries struggle to raise sufficient tax revenues to meet their needs. Pakistan raises only 10% of GDP in tax revenue, whereas the United Kingdom raises more than twice as much, 25% (WDI 2012. In large part, this is due to the fact that tax evasion is widespread in developing countries. Estimates are scant, but we know that a significant share of firms are not even tax-registered (Bruhn et al 2013), and many firms that are tax-registered misreport their taxable income and transactions (Pomeranz 2013, Carillo et al 2014). What is less well known is that the tax instruments used in developing countries also differ significantly from those in developed countries (Gordon & Li 2009). For instance, many developing countries use production-inefficient taxes such as turnover taxes, which can distort firms’ input choices, and which standard prescriptions based on developed country contexts would discourage. What motivates these policies, and could they actually be an optimal response to the presence of evasion? In a paper forthcoming in the Journal of Political Economy, we shed light at this question, using theory and evidence from Pakistan.
Various central bankers in emerging market economies have expressed concerns regarding the international spillovers of the U.S. and European quantitative easing, arguing for more coordinated global monetary policies. Despite the increasing interest in the topic, isolating the effect that the monetary policy of a country has on another country’s economy is not trivial, since many confounding factors (such as trade relations between countries or global macroeconomic shocks) take place simultaneously.
I’m thrilled to announce the April 15 launch of the 2014 Global Findex database, the world’s most comprehensive gauge of global financial inclusion. Drawing on interviews with almost 150,000 adults in over 140 countries, the Global Findex tracks worldwide changes in account ownership and explores how adults save, borrow, make payments, and manage risk. Financial inclusion, measured by the Global Findex as having an account that allows adults to store money and make and receive electronic payments, is critical to ending global poverty. Studies show that broader access to, and participation in, the financial system can boost job creation, increase investments in education, and directly help poor people manage risk and absorb financial shocks.
Our research updates the first Global Findex database, which the World Bank launched in 2011 in partnership with Gallup, Inc. and with funding from the Bill & Melinda Gates Foundation. Their continued support made it possible to add new features to the second edition of the database, including more nuanced questions on mobile banking and an extended module on domestic payments. The 2014 Findex for the first time sheds light on how adults use accounts — and what can be done to have people become more active users of the financial system.
There is much good news to report…. But to learn the details, you’ll need to follow our data launch during the annual World Bank-IMF Spring Meetings.
In 2008, one year ahead of national elections and against the backdrop of the 2008–2009 global financial crisis, the government of India enacted one of the largest borrower bailout programs in history. The program known as the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) unconditionally cancelled fully or partially, the debts of up to 60 million rural households across the country, amounting to a total volume of US$ 16–17 billion.
In both high-income and developing countries, firms’ long-term funding via equity financing plays a smaller role than bond issuances and syndicated loans (Cortina et al., 2015). However, developed and liquid stock markets are expected to play a key role by aggregating information about economic activity and firms’ fundamentals; information that in turn might be useful for firms’ managers, capital providers and regulatory authorities. In this sense, stock prices are expected to improve efficiency by directing capital towards more productive uses. For example, stock prices might facilitate firms’ access to credit by reducing information asymmetries between capital providers and firms, or alternatively, the stock price of a company might be informative to the manager when making a real investment decision.
In a new World Bank working paper, Bilal Zia and his coauthors study how insights from the biology of the human mind can help to better understand and facilitate learning of key development concepts, especially among illiterate populations in poor countries. To make people experience- rather than learning- the concept of probability, the researchers played a simple dice game in rural South Africa in a RCT involving 840 individuals. In the game each player started with one die and rolled till she got a six, then she was handed two dice and rolled till she got two sixes which on average took her much longer. Depending on how fast players were able to roll two sixes, they could reflect and update their beliefs about winning odds. Afterwards, players were told that winning the lotto would be equivalent to them rolling all sixes on nine dice. Read the complete blog post.
Financial crisis are typically associated with severe economic contractions and, in particular, lasting deteriorations in labor market conditions. Both the Great Depression and the 2007-9 recession are dramatic examples of such phenomena, which seems to be a more general attribute of credit-driven episodes of economic contraction (Reihnart and Rogoff, 2009). Why is this?
Despite such close connection between financial crises and sustained rises in unemployment, there is very little understanding of the mechanisms through which disruptions in credit markets transmit to labor market outcomes. In this blog post, we summarize one such mechanism, developed in Buera, Fattal-Jaef, and Shin (2014), which attempts to fill this gap developing a quantitative model with financial and labor market frictions.
Is Quantitative Easing the solution for the Eurozone?
Considering Quantitative Easing (QE) to be an effective way to save the Eurozone from deflation, De Grauwe and Ji (2015) argue that a QE programme can be so structured as not to pose a risk on German taxpayers – this risk being seen as the main obstacle against active policies by the ECB. However, they seem to miss some important points.
First, they fail to recognize that there is little convincing evidence that QE has any significant effect on consumer price inflation: QE does not buy-up ordinary goods and services, and consequently it does not create consumer price inflation. QE has delivered positive effects only when it has been implemented in conjunction with decisive fiscal stimulus, since it has counteracted the interest rate rises that deficit and debt growth would have otherwise caused. Giavazzi and Tabellini (2015) note that an accompanying fiscal expansion is critical to QE’s effectiveness. Yet fiscal expansion does not appear to be an option in the Eurozone, especially in already largely indebted countries, as it would trigger offsetting effects linked to Eurozone members having issued debt in a non-sovereign currency, which would neutralize the action of QE combined with fiscal expansion.
Policymakers and researchers would often like to measure whether reforms have their desired effects, but it’s not always feasible to collect survey data to shed light on this issue. Here, administrative data, that is being collected in any case, can help. Administrative data has no additional cost and may be readily available, particularly in countries that digitize the information they collect.
The ‘safety trap’ hypothesis and secular stagnation
Noting that Eurozone inflation has been declining for almost a year, and constantly undershooting forecasts, Landau (2104) suggests that underpinning those evolutions, including the lack of growth, might be one factor: an excess demand for ‘safe assets’. Essentially — Landau argues — agents have responded to extreme risk aversion by developing a strong inclination for holding liquid and safe assets (typically money and government bonds). In order to accumulate more of these assets, they have reduced consumption and investment, thus depressing aggregate demand. When inflation is low and the economy hits the zero lower bound (ZLB), interest rates cannot reach their (negative) equilibrium levels and the economy falls into what Landau refers to as a ‘safety trap’, with cumulative disinflation, increasing real interest rates, and depression setting in. This sounds as a plausible explanation for secular stagnation in the Eurozone.