A view from Central Europe and the Baltics
Saving for old age is important in countries where longevity is increasing. Countries in Central Europe and the Baltics emerged from the economic transition of the 1990s recognizing that they needed to encourage their workforce to retire later and save more in order to be comfortable in old age. To this end, they modified their pay as you go pension systems which collects taxes from workers to pay retirees (the "first pillar") to create an additional or "second pillar" of individual pension accounts funded by taxes. As these second pillar pension accounts were the private property of individual workers, they were expected to encourage saving. Over time as these savings grew, it would be possible to reduce the pensions paid by the government from the first pillar without reducing the standard of living for pensioners who would be able to rely on complementary pensions from their private saving in the second pillar. Typically, a share of payroll tax receipts was redirected to finance individual pension saving accounts. This resulted in revenue shortfalls in pay as you go you pension schemes, and most governments raised additional debt to meet their obligations which was in turn held by the companies who were managing the pension savings on behalf of employees. However, since the economies were growing rapidly, fiscal deficits were generally kept manageable, easing concerns about additional debt.
A view from Central Europe and the Baltics
Some Observations from Nepal
I've been in Nepal since January helping out with the implementation of a household survey. Throughout February and March, we asked people in two districts – Jhapa, in the south-east of the country on the Indian border, and Tibetan-bordering Sindhupalchok to the north – about their livelihoods, the various taxes they pay, and their relationships with state governance. As part of this research, we've also been carrying out a number of more in-depth qualitative interviews.
When asked about the kinds of taxes that most affect their livelihoods on a day-to-day basis, one of the things that struck me about people's responses was the frequency with which electricity bills were mentioned. At first, I couldn't quite understand why this was coming up so much: that's not a tax, I thought, it's simply a payment made in exchange for a service. In my mind, I began to discount these responses, passing them off as information that missed the points we were trying to get at.
My assumptions were misplaced.
I was recently at a conference in Lahore, Pakistan sponsored by the International Growth Centre where the keynote address was given by Shahbaz Sharif, the Chief Minister of the province of Punjab, Pakistan (100+ million people). While fun to see old friends and colleagues, the conference was a little depressing in the way it reflected the state of the development economics profession.
The Chief Minister posed serious questions that have traditionally been the bread and butter of the economics profession. Unfortunately, we are not even trying to answer them any more. The specific question was “Should I put more money into transport? Infrastructure (power, roads, water)? Law and order? Social services? Or what? And where am I going to get the money?” What questions could be more solidly part of the core of economics than these? Unfortunately none of these were even remotely the focus of the “evidence-based” policy making discussed.
Mariano Bosch, Carmen Pages, and Angel Melguizo at the Inter-American Development Bank (IDB) are proposing a new approach to expanding the coverage of pension systems in Latin America while helping create more and better jobs. Their ideas are spelled out in a new book "Better Pensions, Better Jobs: Towards Universal Coverage in Latin America and the Caribbean." The book is about Latin America but the problems discussed and proposed solutions are relevant for any middle-income country. I think the IDB's proposal is a great contribution to the debate on pension reform. Below I discuss some of the points they make that I agree with and those where I think other options could be considered.
The greatest development challenge facing Sub-Saharan Africa today is lifting 400 million of its people out of extreme poverty. The continent has abundant land and mineral resources to meet the challenge, but only if land governance can be improved. A new study, Securing Africa’s Land for Shared Prosperity, offers a ten-point program to improve land governance by accelerating policy reforms and boosting investments at a cost of US $4.5 billion over 10 years.
LONDON -- I'm just back from the G8 meeting in Northern Ireland, and under the leadership of Prime Minister David Cameron, we focused on some critical but often overlooked elements on how the world can end extreme poverty in a generation: taxes, trade, and transparency. Watch the video to see why I feel so strongly about this.
In practice, theory is something else. I've already heard variants of this expression in several countries and languages. Very often from people referring to the gap between abstract, generic principles and the implementation of projects and policies.
Cover Photo: © Getty Images, Inc.
Book Title: In From the Shadow : Integrating Europe’s Informal Labor
by Truman Packard, Johannes Koettl, Claudio Montenegro
Few phenomena that occupy the time of governments and economists are as ambiguously defined and difficult to measure as the “shadow" or "informal" economy. Those terms immediately make some people think of the guys who built an extension for their house and insisted on being paid in cash. Others remember the taxi driver who took them home after a late night out, and either didn’t have a meter or didn’t turn it on. Those who have been in very poor countries might recall bustling markets where you can haggle for anything from a handful of fresh chilies to a pair of sandals or even livestock. All of these are likely to be part of the unregulated and untaxed transactions that make up a country's informal economy.
I recently conducted a literature review on the impact of tax reforms on private sector development as part of the Investment Climate Impact Project.1 My goal was to take stock of what is currently known about the impact of reforms that the World Bank is supporting in this area and to identify the gaps in knowledge that we ought to fill by conducting more impact evaluations. While tax reforms can have a broad range of effects in the economy, the focus here was on private sector outcomes only, as measured by investment, tax evasion by formal firms, formal firm creation, and firms’ economic performance.
It turns out that most papers in this area study the impact of changing tax rates. Both cross-country and micro-level studies suggest that lowering tax rates can increase investment, reduce tax evasion, promote formal firm creation and ultimately lead to an increase in firms’ sales and GDP growth overall. However, lowering tax rates also has important implications for government revenue and it is thus often difficult to balance the trade-offs between various goals of public policy.
A few receiving countries already tax remittances, often through indirect means. For example, remittances sent from the US to Cuba can only be paid to recipients in Cuban Convertible pesos (CUC) or Chavitos with a tax of 20 percent for conversion of US$ to CUCs. The US government and a US senator called upon Cuba to repeal this tax when the US lifted restrictions on sending remittances to Cuba. Other countries that have a parallel market premium with an overvalued official exchange rate, e.g., Ethiopia, Pakistan, and Venezuela to name a few, also implicitly tax remittances when they require recipients to convert remittances to local currency at uncompetitive official exchange rates. Philippines used to impose a small Documentary Stamp Tax (DST) of 0.3 pesos for every 200 pesos, but this was scrapped in November (see article).