Yesterday I discussed the launch of the latest Doing Business sub-report, which focuses on the ease of paying taxes. This is a laudable effort- paying taxes is painful enough to begin with, why make it more difficult than necessary?
Doing Business seeks to recognize and celebrate policy reforms that improve the ease of doing business, of which tax policy is a critical component. For governments, the incentive to reform in this area seems relatively straightforward: make it easier to pay taxes, and your tax revenue is likely to increase. But what about areas where the results of reform are less immediate and tangible, such as closing a business?
In some cases, it is the desire to improve one's national ranking in the Doing Business report that triggers reform. This was Rwanda's strategy, as outlined by minister of finance James Musoni in a recent World Bank speech (you can review parts of the speech on our Twitter account). These accomplishments fit well into the country's Vision 2020 of becoming a middle income country by the end of the next decade.
But given the limited number of publications like Doing Business, and the fact that not every government has a long-term growth plan like Rwanda's, what other mechanisms can trigger beneficial reforms?
A new paper from Vox provides a simple solution: Lots and lots of elections:
Not only do elections likely have a positive structural effect on economic policy, but they may also have a disruptive cyclical effect. Elections introduce frictions; they are periodic events, the timing of which may affect politicians’ incentives to reform. The structural effect of elections is also significant and quite large. The degree to which they improve policy depends upon their frequency; the more frequent, the better. The net effect of different frequencies on the probability of policy improvement is quite large. Taking the extremes of the range, shifting from an election once a decade to an election each year would almost double the chance of policy improvement in the average year.
The paper notes that quality is as important as frequency, and that dubious elections can actually be more harmful to economic policy than no elections at all.
What do frequent, free elections and Doing Business have in common, besides inspiring economic reform? The first thing that comes to my mind is accountability. If governments are held responsible for their actions, they are likely to push for policies that improve the lives of their constituents. The Vox paper shows that the more frequently these governments are confronted with elections, they more active they are in reforming.
By expanding into sub-national regions, and adding additional metrics such as paying taxes, Doing Business seems to be making a similar bet: the more frequently they publicize reform improvements, the more likely governments are to take action.