0.20 General introduction to savings mobilization  (Page 8/9)

But other stories of success in mobilizing savings through the government budget are hard to find. There are examples of limited histories of success in a few oil producers, such as Indonesia from 1970-1982, where oil revenues fed government surpluses that were plowed into primary and secondary education and infrastructures. But that wasn’t easy (budget category A-a).

The usual pattern is that the government’s MPS out of increased taxes is sufficiently low that increased taxation led to less, not more overall savings. Why?

Consider World Bank or U.N. data for 150-175 nations over this past 40 years, you will find that governments exhibit a higher MPC, not a high MPS. Need reference

While tax ratios-ratios of tax collection to GDP – rose some over the 60s, 70s, and 80s, public sector consumption expenditures expanded at even faster rates then did tax collections. And outside of oil, gas, copper etc., where there are high natural resource incomes ( rents ) savings of government-owned firms were typically negative too .

So, there are two reasons why public savings through the budget declined steadily for most poor nations over past 40 years

1. Inefficient SOE ^s that generate little or no savings (except in oil), and except in China 1985-2014.
2. Rapid growth or government consumption expenditures in many nations

This experience was not confined to just a few countries: in over 50 developing countries, the public consumption share was as high or higher in 2000 than in 1960, even after nearly four decades of intensive efforts to mobilize savings through the budget.

Again, please do not think that government C is necessarily undesirable. In fact, in many poor nations growth in government C has been due to government efforts to hire and keep qualified civil servants and public C is essential to maintain the public sector K stock – roads, schools, harbors.

But sometimes higher government consumption has been due to rapid build-up of military purchases or waste in government procurement of materials, or to upkeep of a government vehicle fleet dominated by Mercedes or Bentleys (in Nkrumah’s Ghana or Shah Pahlevi’s Iran). This type of government consumption not ordinarily very helpful to development.

Taxes and resource mobilization

Why has it proven so difficult to increase tax ratios in LDC ^s ?

And why do tax ratios (T /GDP) differ so markedly across countries?

It is clear that low per capita income constrains tax collection. Note that even for countries at similar levels of income, we find vastly different ratios of T/GNP. Gillis, Perkins, Snodgrass, Chapter 11

What factors might be responsible?

Some hypotheses (for poorer emerging nations)

Foreign trade

Countries with a high share of foreign trade in GDP usually have a higher tax ratio. Why?

Natural resources

Exports – Countries who exports are primarily of oil, gas, minerals tend to have higher T/GDP. See Jurgen Lotz and Elliot Morss, “A Theory of Tax Level Determinants for Developing Countries,” Economic Development and Cultural Change Vol. 18, #3 (April 1978); and Roy W. Bahl, “A Regression Approach to Tax Effort and Tax ratio Analysis,” JMF Staff Papers Vol. 18, #4 (November 1971).