Studies in public finance and related fields that incorporate spatial effects have gained popularity in economic literature. Previous studies have found the presence of spatial interaction among jurisdictions when making policy decisions, in other words, governments at all levels make their decisions by taking into account what their
neighbors are doing. The aim of our study was three-fold: first, we tried to determine the presence of such policy mimicking in governments expenditures; then we did the same for government revenues; and finally, we tested for spatial interaction in government efficiency to determine if it is also influenced by neighboring countries. Most
importantly, we applied the fiscal copycat theory to developing countries, and to the best our knowledge, all existing studies pertaining to this theory have been confined to developed countries only.
We have thus contributed to the empirical literature of fiscal policy mimicking by applying this technique to developing countries and used the results to try and determine the presence of fiscal harmonization. We also extended our analysis by going beyond the exclusive analysis of revenues or expenditures in isolation, and analyzed their spatial interaction in the context of government efficiency. We did this at a national level as opposed to previous studies that have focused on local government level efficiency. In our dissertation, we employed panel data on central government tax revenue and spending in Sub-Saharan Africa and the regional economic bloc of Southern African Coordinating Community, which basically is a sub-set of the SSA sample.
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We used spatial econometric techniques to test for fiscal policy mimicking in our sample countries. We test whether fiscal interactions exist in government tax revenues because countries try to attract businesses so they could expand their tax bases or as it is the case with most regional blocs, whether they do so as a way of harmonizing their regional policies. On the expenditure side, we test whether governments try to please their voters so they could vote them back in power (since we do not expect any significant “ voting with one’s feet” to occur at a country level).
Even though our estimations gave us mixed results in as far as the signs of the coefficients, overall we found the presence of fiscal policy mimicking in these
developing countries. We also observe that our estimates are in some cases smaller in magnitude compared to those obtained in previous studies. When we compare our estimates to the only other study that tested for spatial interaction across countries at a central government level (Redoano 2003), we find that some of our estimates are not that far off from their results. Small spatial coefficients are not unexpected as we are looking at countries that cover a vast area and differ in more ways than one, as compared to most previous studies that have focused on local jurisdictions that tend to have a lot in
common or at a state level which are more homogeneous than a set of developing countries.
From our study we find evidence, and some of it relatively strong, that spatial interaction is present in our samples as we reject the null hypotheses that
0 =
ρ andλ =0. For example, our results reveal that if neighboring countries increase their share of individual income tax revenues to total revenues by 1, then country i would
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found strong evidence of spatial interaction in VAT (ρ=0.3) and excise tax revenues (ρ=0.4) for the SSA sample. Expenditures in education and health also display strong mimicking behavior for the SSA sample and somewhat in SADC. Overall, the contiguity weight matrix performed quite well compared to the distance and HDI weight matrices. We encountered problems with our HDI and GDP per capita weight matrices and we had to redefine them to get them to perform well. We attributed this problem to the big inequalities in the social and economic variables among these developing countries where some are classified as low-low income and some are high-middle income. This would not be a problem for studies that focus on jurisdictions that have similar socio-economic characteristics.
We also tested for government efficiency by relating total taxes to the level of spending as a measure for the “ price/quantity” of government and determining spatial patterns among the governments of these developing countries. While we did find some evidence that when governments simultaneously determine the revenue and spending levels they do consider their neighbors’ policies, our results also showed mostly positive and relatively high correlation in the error terms, which could suggest that we need to improve the estimation of this simultaneity by introducing other control variables.
We conclude that mimicking is not a developed country only phenomenon! We have found evidence of fiscal policy mimicking behavior in the SSA and SADC regions, some of which point to policy harmonization. This is a crucial finding for the African countries as they have been involved in sub-regional economic and political groupings or blocs, most of which share the same objectives which include, among others,
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Strategy Paper that one of the macro-economic liberalization policies it tends to
implement is the harmonization of tax policies. We did find mimicking in individual tax revenues, which are usually not the primary focus of regional integration objectives as tariffs are, thus pointing us to some evidence of voluntary mimicking behavior. For instance, in its Memorandum of Understanding (MoU) in tax cooperation, SADC envisages to harmonize both indirect taxes and VAT as well as to avoid tax competition in the region. However, it should be noted that this MoU was drawn in 2003, which is outside our review period and while these objectives had been initiated some time back, their implementation takes time and this could mean that some voluntary mimicking in these tax revenue categories that started before the formal agreement took place.
Donor funds and the spending constraints attached to these funds, which are similar for most countries, have played a great role in determining how developing countries allocate their budgets and with all of the countries in the sample having relied on donor funds at some point in time, these funds have contributed to some mandated mimicking behavior. The same can be said for conditions imposed by International Financial Institutions (IFIs) through the SAPs and the ESAPs as well as the regional cooperation agreements which also played a role in mandated copycat behavior. While we have included aid to capture donor funds and dummies to capture the impact of SAPs and ESAPs, future studies could enhance this analysis by controlling for these constraints in a more detailed way. Therefore, while our spatial coefficients reflect the presence of mimicking behavior, it is possible that due to all the above-mentioned factors, this may not be copycat behavior per se and we need to control more for these and other world trends such as the downward movement of VAT rates as countries harmonize these.
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We also find evidence of spatial interaction in the error terms in both regions which reflects the presence of omitted variables that are spatially correlated. These could be shocks in the neighboring countries that are felt in the home country. For developing countries and particularly for Sub-Saharan Africa as a whole, such shocks include, among others, prolonged droughts, regional wars, the AIDS pandemic impact on health
expenditures, oil prices, prices of other major imports and prices of the major exports of these countries. These factors need to be controlled for in the model.
From our analysis we conclude that as a result of the above factors, there is some evidence that mandated policy convergence is taking effect in Africa and that in addition, some voluntary mimicking is also present in some taxes and expenditures.
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