Effects of tax reform on Argentina's revenues

Too often, a good tax policy proposal is considered sufficient to improve the tax system - too little consideration is given to weaknesses in tax administration, perhaps because of measurement problems. Analyzing legal and administrative measures and quantitatively evaluating their impact on tax revenues is generally arduous. The authors develop a simple approach to assessing how tax effort affects tax revenues (performance). By"tax effort"they mean changes in tax legislation (except changes in nominal taxes), tax administration, and individual taxpayers attitudes toward tax evasion. Changes in tax administration include increasing tax penalties, new technologies, and administrative reform. They measure tax effort as a residual: the variations in tax revenues that cannot be explained by changes in economic variables and tax structures. Using this approach, one can easily identify factors that influence tax revenues over time, and understand the behavior of tax revenues in developing countries, particularly where macroeconomic conditions are volatile. The authors apply this approach to Argentina; it can easily be applied to other countries. Their main conclusions in this application follow. The administrative dimension of tax reform is at the heart of Argentina's recent fiscal adjustment. Since 1991, tax effort is an average 80 percent higher than during the preceding (temporary) successful adjustment period (under the Austral Plan). An efficient tax administration and an improvement in taxpayer compliance levels appear to precede rather than follow increases in tax revenues. Tax effort is influenced significantly by such macrovariables as GDP growth and inflation, as well as by political (in)stability. It is influenced less by such fiscal variables as alternative sources of financing. In Argentina, the sequence of the tax effort was, first, to broaden the potential value added tax base, and then to reduce tax evasion through higher tax penalties and improvements in the basic functions of tax administration (inspection, audits, tax management, and personnel policy).Public Sector Economics&Finance,Tax Policy and Administration,National Governance,Taxation&Subsidies,Environmental Economics&Policies

Las paradas repentinas y las estrategias cambiarias en América Latina

(Disponible en idioma inglés únicamente) Un análisis de varios estudios de casos específicos en la región sugiere que la capacidad de sostener una política monetaria creíble depende del grado de vulnerabilidad de los países a las repercusiones de las paradas repentinas. A este respecto, hay cuatro aspectos de vital importancia que atenúan esas repercusiones. La apertura de la economía de modo que se produzca un aumento de la oferta de bienes transables reduce la disminución de la absorción de dichos bienes que normalmente acarrea una parada repentina. Reducir el nivel de endeudamiento asegura que la depreciación del tipo de cambio real sea menor. Disminuir los descalces cambiarios en la composición de la deuda en relación con la composición de la producción reduce la vulnerabilidad a los efectos de la valuación. Por último, también es preciso acometer la exposición a posibles contingencias fiscales, a fin de disminuir la vulnerabilidad de las cuentas fiscales, tales como los costosos rescates de bancos producto de los descalces cambiarios en el sector financiero.

Conducción empresarial y flujos de capitales privados hacia América Latina

(Disponible en idioma inglés únicamente) Según investigaciones recientes, factores externos y consideraciones de la gestión política son determinantes claves de los flujos de capitales en América Latina. Proponemos que la conducción empresarial también es un factor determinante crucial. Mostramos que si bien la región se caracteriza por niveles relativamente bajos de conducción empresarial, muestra flujos de capitales altamente inestables. El elevado nivel de inestabilidad económica que caracteriza a la región se debe en parte al comportamiento de los flujos de capitales, los que, a su vez, acusan los efectos de los factores externos. En este trabajo se muestra que al poner en práctica una mejor conducción empresarial, la región puede reducir la sensibilidad de los flujos de capitales a las sacudidas externas y, con ello, ayudar a reducir la inestabilidad de sus economías.

Latin America and the Caribbean needs to do more with less and set its sights on the future

Growing national income in Latin America and the Caribbean is feeding demands for more and better government services. But after raising expenditure during the years of the commodity boom, many governments now face less favourable external conditions and need to adjust. These external headwinds mean there is more pressure to look for domestic sources of growth. As LSE prepares to host the 2018 Annual LSE-IDB Conference on Latin America and the Caribbean (register here) on 1 November 2018, the Inter-American Development Bank’s Chief Economist Alejandro Izquierdo looks at what can be done to make ends meet

Booms and Busts in Latin America: The Role of External Factors

This paper analyzes the relevance of external factors in average quarterly GDP growth for 1990-2006 in the seven largest Latin American countries (LAC7). Modeling the relationship between LAC7 GDP and several external factors, it is found that those factors account for a significant share of variance in LAC7 GDP growth, and that external shocks produce significant responses. Likewise, a significant share of recent LAC7 growth performance can be explained by an external factor “tailwind. ” Also evaluated is the impact of deterioration in external financial conditions. Finally, the relevance of these findings for policy evaluation is emphasized. Growth performance, the strength or weakness of macroeconomic fundamentals and the impact of domestic macro and micro policies on growth can only be properly appraised by first filtering out the effects of external factors.

Information diffusion in international markets

Globalization has been a persistent phenomenon of the post-war period. The gross volume of cross-border capital flows has grown at an average of 25 percent a year, and trade in goods and services has also increased, albeit not as dramatically, but at least twice as fast as world GDP over the past 20 years. Yet, consumers and investors continue to spend and hold a disproportionate share of their assets in local markets-the so-called home-bias has been emphasized by many recent empirical studies. For many researchers, this home bias reflects information asymmetries and the fact that acquiring information across international borders is relatively costly. The main objective of the authors is to identify channels through which information gets disseminated across international markets. They consider three potential channels through which information can affect import and foreign equity purchase decisions in 14 OECD countries. The first channel consists of information spillovers from the commercial to the financial markets and vice-versa. Financial investors and importers share common information, which is also frequently conveyed to them by the same source-banks or financial intermediaries. The second and third channels emphasize seller and buyer reputations in international markets. The seller reputation channel stresses the importance given by, for example, importers in the United States who are considering buying products from Italy to the experience that Canadian and Japanese importers may have accumulated on Italian exporters. The buyer reputation channel examines to what extent a foreign investor or trader seeks information on the reliability of the foreign buyer by assessing his reputation in other countries. While the last two channels are equally important in explaining bilateral import flows, buyer reputation appears to be of greater importance for equity flows in the sample. The authors argue that these three channels may help provide some insights about the recent episodes of contagion across markets and countries that occurred over the past decade. These information channels can create virtuous or vicious circles that may, in turn, lead to unexpected changes in investors'and traders'behaviors across markets.International Terrorism&Counterterrorism,Economic Theory&Research,Financial Intermediation,Environmental Economics&Policies,Labor Policies,Environmental Economics&Policies,Economic Theory&Research,Financial Intermediation,Health Economics&Finance,ICT Policy and Strategies

Difusión de la información en mercados internacionales

(Disponible en idioma inglés únicamente) La información específica sobre el comercio y los mercados financieros a través de las fronteras nacionales es costosa. Los vendedores y compradores prefieren emplear información deducida del comportamiento de sus socios en otros países. Se identifican tres canales a través de los cuales se disemina la información en los mercados de importación y bursátiles en 14 países miembros de la OCDE. El primero es el derrame de información de mercados comerciales a mercados financieros y viceversa. Hallamos importantes elementos de prueba a favor de la primera dirección y algo menos a favor de la dirección contraria, lo que sugiere que los operadores emplean información corriente, frecuentemente de las mismas fuentes, tales como intermediarios financieros. El segundo y el tercer canal tienen que ver más que nada con la reputación de vendedores y compradores en otros mercados. Son igualmente importantes para explicar los flujos bilaterales de importación, pero la reputación de los compradores parece ser más importante para los flujos bursátiles. Los tres canales ayudan a explicar mejor los efectos de contagio entre mercados y países.

Financial Integration and Foreign Banks in Latin America: How Do They Impact the Transmission of External Financial Shocks?

This paper explores the impact of international financial integration on credit markets in Latin America, using a cross-country dataset covering 17 countries between 1996 and 2008. It is found that financial integration amplifies the impact of international financial shocks on aggregate credit and interest rate fluctuations. Nonetheless, the net impact of integration on deepening credit markets dominates for the large majority of states of nature. The paper also uses a detailed bank-level dataset that covers more than 500 banks for a similar time period to explore the role of financial integration—captured through the participation of foreign banks—in propagating external shocks. It is found that interest rates charged and loans supplied by foreign-owned banks respond more to external financial shocks than those supplied by domestically owned banks. This does not hold for all foreign banks. Spanish banks in the sample behave more like domestic banks and do not amplify the impact of foreign shocks on credit and interest rates.Foreign Banks, Credit, Interest Rates, Financial Shocks

Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons

We offer an alternative explanation for the fall of Argentina's Convertibility Program based on the country's vulnerability to Sudden Stops in capital flows. Sudden Stops are typically accompanied by a substantial increase in the real exchange rate that breaks havoc in countries that are heavily dollarized in their liabilities, turning otherwise sustainable fiscal and corporate sector positions into unsustainable ones. In particular, we stress that the required change in relative prices is larger the more closed an economy is in terms of its supply of tradable goods. By contrasting Argentina's performance relative to other Latin American countries that were also subject to the Sudden Stop triggered by the Russian crisis of 1998, we identify key vulnerability indicators that separated Argentina from its piers. We also provide an explanation for the political maelstrom that ensued after the Sudden Stop, based on a War of Attrition argument related to the wealth redistribution conflict triggered by the Sudden Stop and fiscal collapse. This framework also provides elements to rationalize the banking crisis that accompanied the fall of Convertibility.

Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises

Using a sample of emerging markets that are integrated into global bond markets, we analyze the collapse and recovery phase of output collapses that coincide with systemic sudden stops, defined as periods of skyrocketing aggregate bond spreads and large capital flow reversals. Our findings indicate the presence of a very similar pattern across different episodes: output recovers with virtually no recovery in either domestic or foreign credit, a phenomenon that we call a Phoenix Miracle, where output rises from its ashes, suggesting that firms go through a process of financial engineering to restore liquidity outside formal credit markets. Moreover, we show that the U. S. Great Depression could be catalogued as a Phoenix Miracle. However, in contrast to the U. S. Great Depression, EM output collapses occur in a context of accelerating price inflation and falling real wages, casting doubt on price deflation and nominal wage rigidity as key elements in explaining output collapse, and suggesting that financial factors figure prominently in these collapses.