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Trade Liberalization, Exchange Rate Changes, and Tax Revenue in Sub-Saharan Africa

Empirical evidence on the relationship between trade liberalization, exchange rates, and tax revenue is mixed. This paper examines these linkages anew. Using a panel of 22 countries in Sub-Saharan Africa, over 1980–1996, we perform Generalized Method of Moment regressions to test this relationship. We find evidence that the relationship between trade liberalization and tax revenue is sensitive to the measure used to proxy trade liberalization, but that, in general, trade liberalization is not strongly linked to aggregate tax revenue or its components—though with one measure, it is linked to higher income tax revenue. Currency appreciation and higher inflation show some linkage to lower tax revenues or its components. These results show some partial consistency with previous findings, and support the notion that trade liberalization accompanied by appropriate macroeconomic policies can be undertaken in a way that preserves overall revenue yield.

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File URL: http://econ.hunter.cuny.edu/wp-content/uploads/sites/6/RePEc/papers/HunterEconWP403.pdf
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Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 403.

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Length: 32 pages
Date of creation: 2004
Date of revision: 2004
Handle: RePEc:htr:hcecon:403
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Web page: http://econ.hunter.cuny.edu/

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  1. Michael Keen & Johanna Elisabeth Ligthart, 1999. "Coordinating Tariff Reduction and Domestic Tax Reform," IMF Working Papers 99/93, International Monetary Fund.
  2. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  3. Wacziarg, Romain & Welch, Karen Horn, 2003. "Trade Liberalization and Growth: New Evidence," Research Papers 1826, Stanford University, Graduate School of Business.
  4. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: a Skeptic's Guide to the Cross-National Evidence," Working Papers 9912, Economic Research Forum, revised Apr 1999.
  5. Khattry, Barsha & Mohan Rao, J., 2002. "Fiscal Faux Pas?: An Analysis of the Revenue Implications of Trade Liberalization," World Development, Elsevier, vol. 30(8), pages 1431-1444, August.
  6. Adam, Christopher S. & Bevan, David L. & Chambas, Gerard, 2001. "Exchange rate regimes and revenue performance in Sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 64(1), pages 173-213, February.
  7. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  8. David Bevan, 1995. "Fiscal Implications of Trade Liberalization," IMF Working Papers 95/50, International Monetary Fund.
  9. Stephen Tokarick, 1995. "External Shocks, the Real Exchange Rate, and Tax Policy," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 49-79, March.
  10. Dhaneshwar Ghura, 1998. "Tax Revenue in Sub-Saharan Africa; Effects of Economic Policies and Corruption," IMF Working Papers 98/135, International Monetary Fund.
  11. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  12. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  13. Arellano, Manuel & Honore, Bo, 2001. "Panel data models: some recent developments," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 53, pages 3229-3296 Elsevier.
  14. Soto, Marcelo, 2003. "Taxing capital flows: an empirical comparative analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 203-221, October.
  15. Janet Gale Stotsky & Asegedech WoldeMariam, 1997. "Tax Effort in Sub-Saharan Africa," IMF Working Papers 97/107, International Monetary Fund.
  16. Alonso-Borrego, Cesar & Arellano, Manuel, 1999. "Symmetrically Normalized Instrumental-Variable Estimation Using Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 36-49, January.
  17. Andrew Feltenstein, 1992. "Tax Policy and Trade Liberalization; An Application to Mexico," IMF Working Papers 92/108, International Monetary Fund.
  18. Vito Tanzi, 1989. "The Impact of Macroeconomic Policies on the Level of Taxation and the Fiscal Balance in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 633-656, September.
  19. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  20. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  21. Greenaway, David & Morgan, Wyn & Wright, Peter, 2002. "Trade liberalisation and growth in developing countries," Journal of Development Economics, Elsevier, vol. 67(1), pages 229-244, February.
  22. Reint Gropp & Liam P. Ebrill & Janet Gale Stotsky, 1999. "Revenue Implications of Trade Liberalization," IMF Occasional Papers 180, International Monetary Fund.
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