Trade liberalization, exchange rate changes, and tax revenue in Sub-Saharan Africa

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Empirical evidence on the relationship between trade liberalization, exchange rates, and tax revenue is mixed. This paper examines these linkages anew. Using a panel of 22 countries in Sub-Saharan Africa, over 1980-1996, we perform Generalized Method of Moment regressions to test this relationship. We find evidence that the relationship between trade liberalization and tax revenue is sensitive to the measure used to proxy trade liberalization, but that, in general, trade liberalization is not strongly linked to aggregate tax revenue or its components-though with one measure, it is linked to higher income tax revenue. Currency appreciation and higher inflation show some linkage to lower tax revenues or its components. These results show some partial consistency with previous findings, and support the notion that trade liberalization accompanied by appropriate macroeconomic policies can be undertaken in a way that preserves overall revenue yield.

Determinants of Latin America’s Overreliance on International Trade Taxation

“…For a multitude of reasons developing countries find it difficult to collect adequate tax revenues. Other researchers conclude much the same thing (Peters, 2002) and (Khattry, 2003), although some (Agbeyegbe, 2006) contend otherwise.…”

“…In theory it is easy to accomplish (Agbeyegbe, 2006), (Keen & Ligthart, 2002), (Keen & Ligthart, 2005) and (Mujumdar, 2004). After all if you reduce a tax like tariffs, simply increase another type of tax to make up the shortfall.…”

Does Trade Openness Contribute to Driving Financing Flows for Development?

“…Agbeyegbe, Stotsky and WoldeMariam (2006) show that for SSA economies in general trade liberalization is not strongly linked to aggregate tax revenue or its components.…”

“…Nevertheless, the impact of trade openness on government public revenue hinges on several factors, including the structure of trade liberalization and the effect of the latter on each component of government public revenue. These factors could include the extent of replacement of quantitative restrictions with tariffs, how tariff reduction affects imports, the price elasticity of demand for imports, the price elasticity of supply of import substitutes and, how exports respond to trade liberalization measures (see for e.g., Ebrill et al, 1999;and Agbeyegbe et al, 2006 for more details).…”

Financing Social Policy

“…When combined with the broadening of the tax base, the tax to GDP ratio was supposed to rise. However, in the vast majority of countries in subSaharan Africa and Latin America the tax to GDP ratio stagnated or declined (Mehrotra, 1996, Agbeyegbe et al (2004 Substantively, what has changed generally is that, on average, for the low-income countries PRGF-supported programmes target a smaller and more gradual fiscal consolidation than programmes under erstwhile Extended Structural Adjustment Facility (ESAF), and give more weight to revenue increases than expenditure contraction (IEO, 2004). However, even here the Internal Evaluation Office of the IMF finds that the outcomes are not very different between ESAF loans and its renamed successor, the Poverty Reduction and Growth Facility (PRGF).…”