An African Growth Trap: Production Technology and the Time-Consistency of Agricultural Taxation, R&D and Investment

26 Pages Posted: 4 Dec 2003

See all articles by William A. Masters

William A. Masters

Tufts University - Friedman School of Nutrition Science and Policy; Tufts University - Department of Economics

Margaret McMillan

Tufts University - Department of Economics; International Food Policy Research Institute (IFPRI); National Bureau of Economic Research (NBER)

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Date Written: July 3, 2002

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, new political commitment mechanisms or new production techniques would be needed.

Keywords: endogenous policy, political economy, agricultural research, economic growth

JEL Classification: F43, O41

Suggested Citation

Masters, William A. and McMillan, Margaret, An African Growth Trap: Production Technology and the Time-Consistency of Agricultural Taxation, R&D and Investment (July 3, 2002). Available at SSRN: https://ssrn.com/abstract=377501 or http://dx.doi.org/10.2139/ssrn.377501

William A. Masters (Contact Author)

Tufts University - Friedman School of Nutrition Science and Policy ( email )

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HOME PAGE: http://sites.tufts.edu/willmasters

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States

Margaret McMillan

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States

International Food Policy Research Institute (IFPRI) ( email )

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Washington, DC 20005
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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