Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
February 26, 2007
From health care to VAT fraud, IMF research has a varied focus. Here we review six Working Papers published in the first quarter of 2007.
Class in Honduras: Social spending is rising throughout Latin America, but money is not always well spent. (Photo: Thomas Bravo/Reuters)
IMF Working Papers
The IMF is probably best known for its advice and loans to member countries. But IMF economists are also studying a wide array of other topics. Much of this research is published in the IMF's Working Paper series. The views expressed in these papers do not represent official IMF policy. They describe research in progress and are published to solicit comments and spark debate.
Unshackling the financial sector regulator
"The Fear of Freedom: Politicians and the Independence and Accountability of Financial Sector Supervisors," Marc Quintyn, Silvia Ramirez, and Michael W. Taylor, IMF Working Paper No. 07/25.
Compared with the case for central bank independence, which has won a broad following in both academic and policy circles, the case for independence for financial sector regulatory and supervisory agencies is more controversial. Policymakers have been more reluctant to grant independence to regulators, despite strong arguments developed in its favor. This paper surveys trends with respect to independence and accountability in a sample of 32 countries that recently restructured their supervisory landscape, or introduced legislative changes to the supervisory framework.
The authors find that the concept of independence and accountability for financial sector regulatory and supervisory agencies is slowly gaining acceptance—or, at least, being considered seriously. However, there is also evidence of lingering reluctance—to put it mildly—on the part of politicians about granting independence to such agencies. This lack of confidence is translated either into overemphasis on the accountability side or into recourse to direct control measures, or both. In this regard, the survey shows that many governments wish to retain a role in the licensing and de-licensing of banks, which they apparently still view as a politically very sensitive area. The survey results also show that the role and functions of accountability are in general still not very well understood.
Why exchange controls harm trade
"Collateral Damage: Exchange Controls and International Trade," Shang-Jin Wei and Zhiwei Zhang, IMF Working Paper No. 07/8. A revised version is forthcoming in the Journal of International Money and Finance.
The emerging market crises of the 1990s gave rise to the new conventional wisdom that developing countries should be alert to the adverse effects of premature removal of capital controls. But how high is the cost for countries to maintain exchange controls? Filling a gap in the literature, a new IMF study investigates the additional costs to countries that have not received sufficient attention in policy discussions in terms of forgone goods trade.
The study, based on data for 184 countries, finds evidence that exchange controls (on payments for imports and proceeds from exports, on capital transactions, and on foreign exchange transactions and other items) hurt international trade. That is, countries with exchange controls must enforce those controls. This includes more document requirement on exporters and importers, and/or more inspections of shipment of goods across borders in order to minimize the use of mis-invoicing trade to evade capital controls, thereby raising the cost of conducting trade. The study concludes that the collateral damage of imposing exchange controls in terms of forgone trade is sizable, equivalent to 11-15 percentage points of tariff on imports.
A critical look at public expenditure
"Public Expenditure in Latin America: Trends and Key Policy Issues," Benedict Clements, Christopher Faircloth, and Marijn Verhoeven, IMF Working Paper No. 07/21.
An important element of the economic policy debate in Latin America is the proper role of government spending—both as a tool of macroeconomic stabilization and as an instrument for the development of human capital and infrastructure. Despite recent strong growth in the region, poverty remains widespread, as does income inequality. This paper assesses trends in public expenditures in 17 Latin American countries. It finds that fiscal positions have improved in recent years, mainly because of a surge in revenues, especially from commodities. The revenue surge has outpaced broad-based and continuing increases in spending. Still, public debt as a percentage of GDP remains high—about 50 percent for the region—and is still above the maximum prudent level in many countries.
In addition to examining trends in public spending, the paper looks at four key policy issues: the cyclicality of spending, public investment, public employment, and social expenditures. Spending tends to be procyclical, rising during good times and falling during bad, which has delayed the reduction in debt during economic expansions. Public investment is lower than in other regions. And while the wage bill for public employees is similar to that in other regions, the quality of public services is low. Social spending in areas such as education, healthcare, social insurance, and housing represents a large share of total government expenditures, but much of it does not benefit the poor.
How to stop VAT fraud
"VAT Fraud and Evasion: What Do We Know, and What Can be Done?" Michael Keen, and Stephen Smith, IMF Working Paper No. 07/31.
This year, France is suffering from a massive $12 billion shortfall in value-added tax receipts. According to the Financial Times, alarm bells started ringing when the national statistics institute reported an unexpected drop in exports in the second half of 2006. A subsequent inquiry by the finance ministry revealed a surge in what has been dubbed carousel fraud—companies using specially created supplier companies in other European countries to allow them to reclaim value-added tax (VAT) that was never paid in the first place.
This is just one more instance of a worrying increase in VAT fraud in the European Union (EU). In their paper, Michael Keen of the IMF's Fiscal Affairs Department and Stephen Smith of University College London discuss what can be done about VAT fraud in high-income countries. They conclude that a fundamental redesign of the EU's VAT treatment of intracommunity trade is required and discuss the pros and cons of various proposals to fix problems of noncompliance. They conclude by looking at the implications of the EU's VAT debate for the United States, which is pondering the introduction of a VAT at the federal level.
Getting the balance right in health care policy
"What Should Macroeconomists Know about Health Care Policy?" William Hsiao and Peter S. Heller, IMF Working Paper No. 07/13.
The economics of health is becoming increasingly important across the globe. In low-income countries, health has gained prominent recognition for its role in fostering or hindering development—3 of the 10 Millennium Development Goals to be reached by 2015 concern health. In middle-income, transition, and industrial economies, the pressures are different but also daunting.
Among other things, health care costs are putting pressure on spending levels and inflation caused by aging populations and technological advances. Yet those who design and implement macroeconomic policies may easily overlook how these policies influence and are influenced by the health sector. Also, a tendency to favor market solutions can predispose economists to underestimate the market failures that make undesirable an approach that mostly relies on market forces.
This primer is a step toward bridging the divide between macroeconomic policy and health care policy. It highlights the appropriate roles for the market and the state in health care financing and provision, and reviews health sector issues and policy options that confront countries at different stages of economic development.
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The looming financial crisis of most public pension programs has sparked a global debate on pension reform. Most public pension programs, such as Social Security in the United States, are pay-as-you-go systems in which the contributions from current workers are used to pay the benefits of retired workers. These plans are in increasing jeopardy because of twin demographic trends. The fertility rate is declining quite noticeably in all developed countries but birth rates are falling even in high-fertility developing countries. That means there are fewer new workers to pay the taxes required to support pensioners. At the same time, there has been a remarkable increase in life expectancy, which means that a growing number of pensioners will be collecting benefits for an increasing number of years. To assure the viability of these systems, politicians can either cut benefits or increase contributions, or attempt some combination of the two—such as raising the retirement age. These and other proposals to reform public and private pension systems are being debated in many countries. Nearly all of them seem to have the same denominator: moving risks of old-age financing from the state to the individual. "Public Pension Reform: A Primer," Alain Jousten, IMF Working Paper No. 07/28. |
