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An African Growth Trap: Production Technology and the Time‐Consistency of Agricultural Taxation, R&D and Investment
Author(s) -
McMillan Margaret S.,
Masters William A.
Publication year - 2003
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00184
Subject(s) - economics , production (economics) , investment (military) , yield (engineering) , public good , government (linguistics) , tax revenue , monetary economics , macroeconomics , public economics , politics , microeconomics , linguistics , philosophy , materials science , political science , metallurgy , law
Why do so many African governments consistently impose high tax rates and make little investment in productive public goods, when alternative policies could yield greater tax revenues and higher national income? The authors posit and test an intertemporal political economy model in which the government sets tax and R&D levels while investors respond with production. Equilibrium policy and growth rates depend on the initial cost structure. It is found that in many (but not all) African countries, low tax/high investment regimes would be time‐inconsistent, primarily because production technology requires relatively large sunk costs. For pro‐growth policies to become sustainable, new political commitment mechanisms or new production techniques would be needed.