Tax Evasion, the Provision of Public Infrastructure, and Growth: A General Equilibrium Approach to Two Very Different Countries, Egypt and Mauritius

We construct a dynamic multi-period general equilibrium model and use it to analyze prospects for growth in two very different countries, Egypt and Mauritius. The use of a single model has the advantage that when comparing alternative policies across countries, it is not necessary to worry if different conclusions are based solely upon model differences, as would be the case with multiple models. In the case of Egypt we look at the effects of the revolution of 2011 on growth, in particular, at the impact of a dramatic decline in tourism. In addressing the issue of how to increase growth we focus upon a particular problem in Egypt, namely the low rate of tax compliance. Accordingly, we look at fiscal policies designed to reduce tax evasion, and find that these policies are also successful in modestly increasing GDP growth. Mauritius has not suffered from any immediate shock, as has Egypt. However shortages in public infrastructure have been identified as bottlenecks in GDP growth, which has slowed in recent years. We therefore estimate elasticities of private production with respect to stocks of public infrastructure, and use these elasticities to implement our general equilibrium model. We find that modest increases in spending upon public infrastructure, compensated for by corresponding decreases in current spending, can lead to increases in real GDP growth. Beyond certain levels, however, more infrastructure spending will actually lead to a decline in real GDP growth.