Hamid Reza Davoodi

Corruption, Public Investment, and Growth

Up to the time when a huge corruption scandal, popularly labeled “tangentopoli” (bribe city), brought down the political establishment that had ruled Italy for several decades, that country had reported one of the largest shares of capital spending in GDP among the OECD countries. After the scandal broke out and several prominent individuals were sent to jail, or even committed suicide, capital spending fell sharply. The fall seems to have been caused by a reduction in the number of capital projects being undertaken and, perhaps more importantly, by a sharp fall in the costs of the projects still undertaken. Information released by Transparency International (TI) 1 reports that, within the space of two or three years, in the city of Milan, the city where the scandal broke out in the first place, the cost of city rail links fell by 52 percent, the cost of one kilometer of subway fell by 57 percent, and the budget for the new airport terminal was reduced by 59 percent to reflect the lower construction costs. Although one must be aware of the logical fallacy of post hoc, ergo propter hoc, the connection between the two events is too strong to be attributed to a coincidence. In fact this paper takes the view that it could not have been a coincidence

Corruption and the Provision of Health Care and Education Services

Government intervention to correct market failures is often accompanied by government failures and corruption. This is no more evident than in social sectors that are characterized by significant market failures and government intervention. However, the impact of corruption on the public provision of social services has not been analyzed. This paper reviews the relevant theoretical models and users’ perceptions of corruption in the public provision of social services. It then provides evidence that reducing corruption can result in significant social gains as measured by decreases in child and infant mortality rates, percent of low-birthweight babies, and primary school dropout rates.

Income Distribution and Tax and Government Social Spending Policies in Developing Countries

This paper reviews income distribution in developing (and transition) countries in recent decades. On average, before-tax income distribution in developing countries is less unequal than in industrial countries. However, unlike industrial countries, developing countries in general have not been able to use tax and transfer policies effectively to reduce income inequality. During the 1980s and 1990s, many developing countries experienced an increase in income inequality. The government health care and primary and secondary education programs in developing countries are not well targeted, but their incidence tends to be progressive.

Corruption, Structural Reforms, and Economic Performance in the Transition Economies

Recent studies have highlighted the adverse impact of corruption on economic performance. This paper advances the hypothesis that corruption is largely a symptom of underlying weaknesses in public policies and institutions, a formulation that provides deeper insights into economic performance than do measures of “perceived corruption.” The hypothesis is tested by assessing the relative importance of structural reforms vs. corruption in explaining macroeconomic performance in the transition economies. The paper finds that for four widely used measures of economic performance—growth, inflation, the fiscal balance, and foreign direct investment—structural reforms tend to dominate the corruption variable.

How Useful Are Benefit Incidence Analyses of Public Education and Health Spending

This paper provides a primer on benefit incidence analysis (BIA) for macroeconomists and a new data set on the benefit incidence of education and health spending covering 56 countries over 1960-2000, representing a significant improvement in quality and coverage over existing compilations. The paper demonstrates the usefulness of BIA in two dimensions. First, the paper finds, among other things, that overall education and health spending are poorly targeted; benefits from primary education and primary health care go disproportionately to the middle class, particularly in sub-Saharan Africa, HIPCs and transition economies; but targeting has improved in the 1990s. Second, simple measures of association show that countries with a more propoor incidence of education and health spending tend to have better education and health outcomes, good governance, high per capita income, and wider accessibility to information. The paper explores policy implications of these findings.

Tax Potential vs. Tax Effort: A Cross-Country Analysis of Armenia's Stubbornly Low Tax Collection

Despite recording double digit growth since 2000, Armenias tax-to-GDP ratio has been fairly stable at about 14½ percent. This paper catalogues a range of factors that may account for Armenias stubbornly for tax collection by benchmarking Armenias tax-to-GDP against some comparator countries and conducting an extensive econometric study of the main determinants of tax collection. We find empirical support for the hypothesis that the persistence of Armenias low tax-GDP ratio can be traced to persistence of weak institutions and a large shadow economy. The gap between the potential and actual tax collection in Armenia could be as high as 6½ percent of GDP. We conclude with some policy recommendations that, if adopted, can boost revenue buoyancy.

Monetary Transmission Mechanism in the East African Community: An Empirical Investigation

Do changes in monetary policy affect inflation and output in the East African Community (EAC)? We find that (i) Monetary Transmission Mechanism (MTM) tends to be generally weak when using standard statistical inferences, but somewhat strong when using non-standard inference methods; (ii) when MTM is present, the precise transmission channels and their importance differ across countries; and (iii) reserve money and the policy rate, two frequently used instruments of monetary policy, sometimes move in directions that exert offsetting expansionary and contractionary effects on inflation - posing challenges to harmonization of monetary policies across the EAC and transition to a future East African Monetary Union. The paper offers some suggestions for strengthening the MTM in the EAC.

Public Expenditure and Governance

After a weak performance during the so-called lost decade of the 1980s, the economies of Central America rebounded to varying degrees in the 1990s. The rebound was due to a number of factors, ranging from improvements in fiscal, monetary and exchange rate policies to an accelerating pace of structural reforms, expansion of the world economy and a more favorable terms of trade.