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An African Growth Trap: Production Technology and the Time‐Consistency of Agricultural Taxation, R&D and Investment

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  • Margaret S. McMillan
  • William A. Masters

Abstract

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.

Suggested Citation

  • Margaret S. McMillan & William A. Masters, 2003. "An African Growth Trap: Production Technology and the Time‐Consistency of Agricultural Taxation, R&D and Investment," Review of Development Economics, Wiley Blackwell, vol. 7(2), pages 179-191, May.
    • Handle: RePEc:bla:rdevec:v:7:y:2003:i:2:p:179-191
    DOI: 10.1111/1467-9361.00184
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    Cited by:

    1. Bamou, Ernest & Masters, William A., 2007. "Distortions to Agricultural Incentives in Cameroon," Agricultural Distortions Working Paper Series 48518, World Bank.
    2. Margaret S. McMillan & William A. Masters & Harounan Kazianga, 2011. "Rural Demography, Public Services and Land Rights in Africa: A Village-Level Analysis in Burkina Faso," NBER Working Papers 17718, National Bureau of Economic Research, Inc.
    3. Chih Ming Tan, 2010. "No one true path: uncovering the interplay between geography, institutions, and fractionalization in economic development," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(7), pages 1100-1127, November/.
    4. Masters, William A. & Garcia, Andres F., 2009. "Agricultural Price Distortion and Stabilization: Stylized facts and Hypothesis Tests," Agricultural Distortions Working Paper Series 50301, World Bank.
    5. Aimable Nsabimana & Franklin Amuakwa-Mensah, 2018. "Does mobile phone technology reduce agricultural price distortions? Evidence from cocoa and coffee industries," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 6(1), pages 1-24, December.
    6. Lord Andzie-Quainoo & Robin Grier, 2014. "Tropical Agriculture: Is Africa Different?," Review of Development Economics, Wiley Blackwell, vol. 18(4), pages 640-654, November.

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