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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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  • McMillan, Margaret S.
  • Masters, William A.

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? We 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 initial cost structure. We find 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, commitment mechanisms or new production techniques would be needed.

Suggested Citation

  • McMillan, Margaret S. & Masters, William A., 2000. "An African Growth Trap: Production Technology And The Time-Consistency Of Agricultural Taxation, R&D And Investment," Miscellaneous Papers 11839, Agecon Search.
  • Handle: RePEc:ags:miscpa:11839
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    References listed on IDEAS

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    6. Bernard, Andrew B & Jones, Charles I, 1996. "Comparing Apples to Oranges: Productivity Convergence and Measurement across Industries and Countries," American Economic Review, American Economic Association, vol. 86(5), pages 1216-1238, December.
    7. Alston, Julian M. & Wyatt, T. J. & Pardey, Philip G. & Marra, Michele C. & Chan-Kang, Connie, 2000. "A meta-analysis of rates of return to agricultural R & D: ex pede Herculem?," Research reports 113, International Food Policy Research Institute (IFPRI).
    8. William Easterly & Ross Levine, 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions," The Quarterly Journal of Economics, Oxford University Press, pages 1203-1250.
    9. Masters, William A. & Bedingar, Touba & Oehmke, James F., 1998. "The impact of agricultural research in Africa: aggregate and case study evidence," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 19(1-2), September.
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    11. Besley, Timothy, 1997. "Monopsony and Time-Consistency: Sustainable Pricing Policies for Perennial Crops," Review of Development Economics, Wiley Blackwell, pages 57-70.
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    Cited by:

    1. Bamou, Ernest & Masters, William A., 2007. "Distortions to Agricultural Incentives in Cameroon," Agricultural Distortions Working Paper 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 50301, World Bank.

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