1. 1 W HY DO INDUSTRIAL POLICY ? D OES IT WORK ? o Growing out of natural resources  The natural resources curse  The Dutch disease o Escaping excessive concentration o Picking priorities o Special economic zones: What do they bring? o Tax incentives: How efficient o Soft industrial policy: Export promotion

2. 2 T HE NATURAL RESOURCES CURSE Sachs-Warner 2001: Growth 1970-89 vs the share of primary-product exports in GDP Correlation between growth and share of natural resources after controlling for initial income and OPEN Simple correlation between growth and share of natural resources

3. 3 T HE « CONDITIONAL CURSE »: CONTROLLING FOR OTHER GROWTH DETERMINANTS

4. 4 P LOTTING A PARTIAL CORRELATION

5. 5 T HE D UTCH DISEASE

6. 6 D IVERSIFICATION AND DEVELOPMENT Concentration and development Share of primary products in exports and GDP growth volatility

7. 7 W HY DO INDUSTRIAL POLICY ? Justifying industrial policy requires a market failure o Synergies/externalities o Imperfect information, … Good 1 Good 2 E 1 PPF Worldpriceline Good 1 Good 2 E 1 E 2 PPF Zone ofincreasing returns/agglomerationin the production of good 2 Targetedby IP Producer-price ratio

8. 8 A FRICA ’ S INDUSTRIALIZATION PROBLEM Why industrialize? Productivity economywide doesn’t converge between countries But manufacturing value added does

9. 9 A FRICA ’ S INDUSTRIALIZATION PROBLEM The bell curve of industrialization Manufacturing value added / GDP Manufacturing jobs / Total employment

10. 10 W HY IS A FRICA NOT INDUSTRIALIZING ? The later they come, the harder it gets Manufacturing value added/GDP at its peakManufacturing employment at its peak

11. 11 S TRUCTURAL ADJUSTMENT NOT WORKING, AGAIN Ghana Ethiopia

12. 12 I S A FRICA TOO EXPENSIVE ?

13. 13 O R JUST FAILING TO IMPROVE ITS BUSINESS ENVIRONMENT ? DB cost to export DB cost to import LPI Corruption

14. 14 S PECIAL ECONOMIC ZONES, THE SILVER BULLET ? OLAM’s planned SEZ in Gabon

15. 15 S PECIAL ECONOMIC ZONES Spreading all over the world o By 2006, 130 countries had one, 3’500 around the world o Motivations  Short-cut reforms  Aggomeration economies  Visibility o Well known successes  Masan  Penang  Shenzen  Mauritius o But many other less successful—most of Africa’s

16. 16 S PECIAL ECONOMIC ZONES, THE SILVER BULLET ?

17. 17 bla A NALYSIS AND UNDERSTANDING «B IG HITS »

18. 18 SEZ S : BACKWARD LINKAGES Some of the most successful ones (Vietnam, Bangladesh, Lesotho before 2005) have the weakest backward linkages

19. 19 SEZ S : GOOD JOBS ? Differential between SEZ average wage and economy-wide minimum wage, in percent

20. 20 SEZ S : L OCAL HIRING

21. 21 S PECIAL ECONOMIC ZONES : I NCENTIVES FOR FOREIGN INVESTORS

22. 22 F ISCAL INCENTIVES : T HE CASE OF A NTIGUA In 2003, Antigua extended the tax holiday for hotels from 5 years to 25 All Eastern Caribbeans share similar institutions and business climate Source: World Bank (2012), Tax burden and incentives in Gabon, p. 29

23. 23 C ORPORATE TAXATION : G OOD NEWS … Corporate income taxes / GDP, 1996-2007 Source: Abbas, Ali; A. Klemm, S. Bedi and J. Park (2012), “A Partial Race to the Bottom: Corporate tax Developments in Emerging and Developing Countries; IMF working paper WP/12/28

24. 24 … M ASKING A RACE TO THE BOTTOM Effective marginal tax rates, 1996-2007 Effective average tax rates, 1996-2007 Source: Abbas, Ali; A. Klemm, S. Bedi and J. Park (2012), “A Partial Race to the Bottom: Corporate tax Developments in Emerging and Developing Countries; IMF working paper WP/12/28

25. 25 C USTOMS DUTIES LOSSES TO EXEMPTIONS In Gabon, duty and tax exemptions are generously granted to foreign investors. The result: Reduced revenue for the Treasury Losses due to special regimes, in percent of potential tax revenue Source: World Bank (2012), Tax burden and incentives in Gabon, p. 29

26. 26 P ATTERN OF TAX REFORMS SUGGESTS RACE TO THE BOTTOM RATHER THAN RATIONALISATION Source: Abbas, Ali; A. Klemm, S. Bedi and J. Park (2012), “A Partial Race to the Bottom: Corporate tax Developments in Emerging and Developing Countries; IMF working paper WP/12/28

27. 27 A CASE STUDY : T HE ELIMINATION OF INVESTMENT INCENTIVES IN I NDIA Source: James, Sebastian, 2007, “The Effect of Tax Rates on Declared Income: An Analysis of Indian Taxpayer Response to Changes in Income Tax Rates,” Ph.D. diss., Harvard University, quoted in James (2009)

28. 28 P RIMA - FACIE EVIDENCE FROM LARGE TAX REFORMS Source: Abbas, Ali; A. Klemm, S. Bedi and J. Park (2012), “A Partial Race to the Bottom: Corporate tax Developments in Emerging and Developing Countries; IMF working paper WP/12/28

29. 29 T HE EFFECT OF TAX INCENTIVES ON FDI Regression line for low-income countries Source: James, Sebastian, 2007, “The Effect of Tax Rates on Declared Income: An Analysis of Indian Taxpayer Response to Changes in Income Tax Rates,” Ph.D. diss., Harvard University, quoted in James (2009)

30. 30 FDI, FUNDAMENTALS AND TAX INCENTIVES : E VIDENCE FROM UEMOA - C EMAC

31. 31 E CONOMETRIC EVIDENCE FROM A PANEL OF 47 COUNTRIES Source: Abbas, Ali; A. Klemm, S. Bedi and J. Park (2012), “A Partial Race to the Bottom: Corporate tax Developments in Emerging and Developing Countries; IMF working paper WP/12/28 (lagged)

32. 32 S OFT INDUSTRIAL POLICY : EXPORT PROMOTION

33. 33 bla R ECOMMENDATIONS IN TERMS OF EXPORT PROMOTION ( I )

34. 34 bla R ECOMMENDATIONS IN TERMS OF EXPORT PROMOTION ( I I)

35. 35 Program covers 2005-2009 o Mixture of matching grants and technical assistance to  Develop an export activity/grow out of single-buyer relationships  Get into new markets  Export new products o 455 firms had completed Famex programs at end-2009 Activities co-financed by FAMEX o Prospection: acquisition of information on foreign markets, purchase of data, or missions abroad to visit foreign exhibitions o Promotion: production of marketing information (design, production and publication of ads in various media), firm representation in fairs and exhibitions, and mailings o Product development: production of samples, package design o Firm development: organizational issues like setting up a marketing watch, an export cell, or an export-oriented business plan o Foreign subsidiary creation: legal, consulting, rental and salary costs for the first year of establishment. T UNISIA ’ S EXPORT PROMOTION

36. 36 Matching-DID estimator (see Heckman et al. 1998, Blundell & Costa Dias 2009): τ is treatment year and w ij are the weights used in the matching (kernel, NN). o Compares the change in outcomes for FAMEX firms relative to the change in outcomes for matched control firms before and after FAMEX o Controls for differences in pre-treatment attributes through matching Problem: Tunisian firms received FAMEX assistance in different years, so τ = τ(i), and calendar time matters for performance E STIMATING « TREATMENT EFFECTS » ( I )

37. 37 One possible fix: restrict matching for treatment firm treated in τ(i) to controls observed in τ(i): Alternative: revert to a regression framework using propensity score as weights (Hirano, Imbens and Ridder 2003). That is, estimate a simple DID equation with unit weights for treated firms and for controls. E STIMATING « TREATMENT EFFECTS » ( II )

38. 38 Cumulative effects: o Disappear after 2 years for export value o Remain significant up to 5 years for # of products and destinations E XPORTERS SPREADING THEMSELVES TOO THIN ? B ASELINE IMPACT EFFECT Note: All regs include firm controls and year effects

39. 39 R ESULTS VS. EXPECTATIONS Initial expectations… …vs. what happened

40. 40 I MPACT EFFECT, BY OBJECTIVE Effects on primary stated objective (along diagonal) do not appear either larger or more precisely estimated; most precisely estimated effects are always on # of destinations Dummies, add up to treatment

41. 41 I MPACT EFFECT, BY ACTIVITY Effects of prospection (getting to know) and promotion (getting known) seem most significant (suggesting informational market failure?) Amounts Total (program) amounts disbursed by activity: See last slide Selection correction based on PSM, i.e. corrects only for selection into the program; not into particular activity amounts

42. 42 E XTERNALITIES Impressive absence of results—like Bernard & Jensen 2004. Bad proxy? Or no externalities? If anything, negative (also like B&J): poaching of managers/workers using taxpayer’s money?

43. 43 Estimated treatment benefit o Average annual export growth for control firms, 2004-2008: 8.35% o Estimated annual export growth for treated firms in treatment year: 8.35%*1.667= 13.9% o Average exports per firm in 2004: TND 2’308K Estimated treated-firm exports in treatment year: TND 2’308K *1.139 = TND 2’629K Estimated treated-firm exports in treatment year: TND 2’308K *1.083 = TND 2’501K Difference attributable to treatment: TND 128.5K Treatment cost Average grant amount disbursed per Famex beneficiary: TND 21.7K Total cost (matching grant + firm own expense) : TND 2*21.7K = TND 43.4K Return based on impact effect o On grant: TND 128.5k additional exports for 21.7k TND (6 for 1) o On total investment: TND 128.5k for 43.4k TND (3 for 1) Is exports the right metric? Value added? Profits? A ROUGH COST - BENEFIT ANALYSIS

44. 44 H UMAN CAPITAL ENDOWMENT : M OROCCO VS. W ORLD Insufficient investment in education shows up through international comparison o Morocco has been investing o But the world has been moving faster o Worse: the provision of education is highly inefficient