On the Causality between Trade Credits and Imports: Evidence and Possible Implication for Trade Penalties on Debt Defaults

This study investigates the association between trade credits and imports of developing countries. Made available by its creditors, the main function of trade credits is to facilitate cross-border transactions of goods and services. This study finds that the reliance of imports on trade credits varies across regions and income: towards the end of the 1990s, the trade credits to imports ratio ranged from 0.20 for East Asia & the Pacific to 0.87 for Africa, and from 0.24 for high-income countries to 0.79 for low-income countries. Applying panel and cross-country estimation, we find that past trade credits help predict current imports, but past imports do not alter the future path of trade credits. Further, the positive association between trade credits and imports is larger for countries more dependent upon trade credits. The findings support the notion that countries make debt repayments to avoid any potential disruption on the line of trade credits. We also find that the trade credits penalty could materialize within less than two quarters

Firm size and taxes

The scale dependence in firm growth (smaller firms grow faster) is systematically reflected in the size distribution. This paper studies whether taxes affect the equilibrium firm size distribution in a cross-country context. The main finding is that the empirical association between firm growth and corporate tax (VAT) is positive (negative), with notable differences in the response of manufacturing firms and that of the others. We draw implications for recent debate on the impact of taxes and tax avoidance on the organization of firms in the economy

The Fiscal Stimulus of 2009-10: Trade Openness, Fiscal Space and Exchange Rate Adjustment

This paper studies the cross-country variation of the fiscal stimulus and the exchange rate adjustment propagated by the global crisis of 2008-9, indentifying the role of economic structure in accounting for the heterogeneity of response. We find that greater de facto fiscal space prior to the global crisis and lower trade openness were associated with a higher fiscal stimulus/GDP during 2009-2010 (where the de facto fiscal space is the inverse of the average tax-years it would take to repay the public debt). Lowering the 2006 public debt/average tax base from the level of low-income countries (5.94) down to the average level of the Euro minus the Euro-area peripheral countries (1.97), was associated with a larger crisis stimulus in 2009-11 of 2.78 GDP percentage points. Joint estimation of fiscal stimuli and exchange rate depreciations indicates that higher trade openness was associated with a smaller fiscal stimulus and a higher depreciation rate during the crisis. Overall, the results are in line with the predictions of the neo-Keynesian open-economy model

Equity Prices and Financial Globalization

This paper examines the association between equity returns, economic shocks, and economic integration. The empirical findings show that oil prices and U.S. Federal Reserve funds rates are associated with negative responses of international equity returns, the association which a standard asset-pricing model is capable of explaining the patterns of international differences. We also find that the effects of global economic shocks operate through the current excess returns of equity prices. Empirically, trade integration increases the responses of international equity returns to oil prices, while finance integration increases the responses of equity returns to Federal Reserve funds rates across countries

Income inequality, tax base and sovereign spreads

This note investigates the association of greater income inequality and the tax base, de-facto fiscal space, and sovereign spreads. Using data for the 50 countries in 2007, in 2009 and in 2011, we find that higher income inequality is associated with lower tax base, lower de-facto fiscal space, and higher sovereign spreads. The economic magnitude of these effects is rather large: a 0.01 increase in the Gini coefficient of inequality, is associated in 2011 with a lower tax base of 2 % GDP, and with higher sovereign spread of 45 basis points

Development threshold, capital flows, and financial turbulence

We study capital flows in a panel of 130 countries, and derive the implications for the observed patterns of capital flows and capital controls before and into the crisis of 2008–11. We find that the size of capital flows is positively correlated with country's income level. In addition, capital flight has a non-linear relationship with the income level. Using the Hansen threshold estimation, we identify a three-stage threshold effect: for low-income countries (GDP per capita below US$3,000), capital flight increases as the income level rises; and only after the economy passes a threshold level (GDP per capita above US$ 5,000), capital flight declines with income. We conclude with a case study of Brazil and Korea, observing that the decisions to implement capital control measures tend to be pushed around by the feedbacks among economic growth, currency appreciation, and the global financial conditions

Economic Integration and Government Revenue from Financial Repression

We study a relationship between economic openness via financial and trade integration and government revenue from financial repression. An implicit budgetary saving, the financial repression revenue, as measured by the stock of government domestic debt multiplied by the difference between effective foreign and domestic interest rate, has declined significantly from the 1980s into the 2000s across the upper-income, the middle-income, and the low-income developing countries. While we find that both the financial and trade openness have a negative association with the financial repression revenue in the panel of countries, the effect of financial openness is stronger and the empirical correlations depend on the quality of governmental and budgetary management

The Collection Efficiency of the Value Added Tax: Theory and International Evidence

This paper evaluates the political economy and structural factors explaining the collection efficiency of the Value Added Tax [VAT]. We consider the case where the collection efficiency is determined by the probability of audit and by the penalty on underpaying. Implementation lags imply that the present policy maker determines the efficiency of the tax system next period. Theory suggests that the collection efficiency is impacted by political economy considerations greater polarization and political instability would reduce the efficiency of the tax collection. In addition, collection is impacted by structural factors affecting the ease of tax evasion, like the urbanization level, the share of agriculture, and trade openness. Defining the collection efficiency of the VAT as the ratio of the VAT revenue to aggregate consumption divided by the standard VAT rate, we evaluate the evidence on VAT collection efficiency in a panel of 44 countries over 1970-99. The results are consistent with the theory - a one standard deviation increase in durability of political regime, and in the ease and fluidity of political participation, increase the VAT collection efficiency by 3.1% and 3.6%, respectively. A one standard deviation increase in urbanization, trade openness, and the share of agriculture changes the VAT collection efficiency by 12.7%, 3.9%, and - 4.8%, respectively. In addition, a one standard deviation increase in GDP/Capita increases the tax efficiency by 8.1%. Qualitatively identical results apply for an alternative measure of VAT collection efficiency, defined by the ratio of VAT revenue to GDP divided by the standard VAT.

Globalization and Developing Countries - A Shrinking Tax Base?

This paper evaluates the impact of globalization on the tax bases of countries at varying stages of development. We see globalization as a process that induces countries to embrace greater trade and financial integration. This in turn should shift their tax revenue from "easy to collect" taxes (tariffs and seigniorage) towards "hard to collect" taxes (value added and income taxes). We find that trade and financial openness have a positive association with the "hard to collect" taxes, and a negative association with the "easy to collect" taxes.

The Effect of World Bank Trade Adjustment Assistance on Trade and Growth: 1987-2004, Is the Glass Half Full of Half Empty?

This paper studies the association between trade reform, growth, and trade adjustment assistance, in a sample of developing countries that underwent trade reforms during 1987-2004. Our analysis explicitly differentiates between a group of countries that received trade-adjustment loans from the World Bank, and a non-recipient group. The results suggest that trade adjustment assistance is positively associated with economic growth after trade reform in a medium- to long-run. Comparing to a pre-reform period and to the non-recipient group, the recipient countries registered 0.2 percent higher growth of real GDP/capita, 5.0 percent higher import growth, and 2.5 percent higher export growth during a period of three to five years after trade reform