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This paper analyzes whether taxation can be successfully used to reduce the incidence of labor informality and achieve higher equality in a globalized economy. To this purpose, it develops a two-area model: a developed country and an emerging country. The two areas differ according to the size of the informal sector, which is characterized by a more flexible labor market and lower productivity. To illustrate the potential role of taxation in achieving a more fair income distribution, the paper introduces a trade shock to simulate the effects of trade liberalization. Trade expansion has often been blamed for leading to an expansion of the informal sector and a widening of wage income disparities. In this context, the paper analyzes whether a budget-neutral tax reform-switching the tax burden from payroll taxes paid by firms operating in the formal sector to a consumption tax-can mitigate possible adverse effects of trade liberalization and support labor formalization. The effects of taxation are seen in the context of the trade-offs between growth, labor formality and equity. The analysis suggests that small improvements in formalization, resulting from the tax reform, come at the cost of widening income inequality. To reduce the incidence of low-quality jobs, tax policy interventions should go hand in hand with more effective social protection systems and labor laws.

Elasticity of Substitution --- Equity --- Inequality --- Informal Sector --- International Economics and Trade --- Labor Formalization --- Labor Markets --- Macroeconomics and Economic Growth --- Public Sector Development --- Tax Reform --- Taxation --- Taxation and Subsidies --- Trade Liberalization --- Trade Policy

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This paper estimates the elasticity of substitution of U.S. imports using detailed trade data over the 1990-2003 period. The authors use a two-stage least squares framework in order to identify the elasticity parameter of interest. The authors use the elasticity estimates to assess the extent to which Latin American and Chinese goods compete in the U.S. market by providing forecasts of how alternative policy scenarios may affect exports to the United States. The analysis considers the following scenarios: (i) currency revaluation in China; (ii) elimination of U.S. tariffs on Latin American exports under a hemispheric free trade agreement; and (iii) the elimination of quotas on apparel and textile exports under the Multi-Fiber Agreement. The findings show that a 20-percent appreciation of the renminbi reduces Chinese exports to the United States by a fifth, although since other regions increase sales to that market (0.5 percent for Latin America), U.S. imports decline by only 1.7 percent. Hemispheric free trade would increase Latin America's exports to the United States by around 3 percent. The removal of the quotas would lead to a sharp increase in Chinese sales to the United States (40 percent), but Latin America would see its share of the U.S. market decline by around 2 percent (2.5 percentage points). China's gains would come mainly at the expense of other regions of the world.

Comparative advantage --- Competitiveness --- Debt Markets --- Economic Theory and Research --- Elasticity --- Elasticity of substitution --- Exports --- Finance and Financial Sector Development --- Forecasts --- Free Trade --- Free trade --- International Economics & Trade --- Low tariffs --- Macroeconomics and Economic Growth --- Markets and Market Access --- Public Sector Development --- Quotas --- Trade policy

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This paper develops a dynamic general equilibrium model to explore industrial evolution and economic growth in a closed developing economy. The authors show that industries will endogenously upgrade toward the more capital-intensive ones as the capital endowment becomes more abundant. The model features a continuous inverse-V-shaped pattern of industrial evolution driven by capital accumulation: As the capital endowment reaches a certain threshold, a new industry appears, prospers, then declines and finally disappears. While the industry is declining, a more capital-intensive industry appears and booms, ad infinitum. Explicit solutions are obtained to fully characterize the whole dynamics of perpetual structural change and economic growth. Implications for industrial policies are discussed.

Agriculture --- Consumers --- Development economics --- Economic Growth --- Economic growth --- Economic Theory and Research --- Elasticity --- Elasticity of substitution --- Equilibrium --- Externality --- GDP --- Growth models --- Growth rate --- Human capital --- Income --- Macroeconomics and Economic Growth --- Open economies --- Optimization --- Political Economy --- Production function --- Productivity growth --- Real interest rate --- Structural change --- Total output

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March 2000 - What role do supply-side factors play in the dynamics of output and absorption in exchange rate-based stabilization programs? Agenor and Pizzati study the dynamics of output, consumption, and real wages induced by a disinflation program based on permanent and temporary reductions in the nominal devaluation rate. They use an intertemporal optimizing model of a small open economy in which domestic households face imperfect world capital markets, the labor supply is endogenous, and wages are flexible. The model predicts that, with a constant capital stock and no investment, there is an initial reduction in real wages and output expands. Consumption falls on impact but increases afterward. In addition, with a temporary shock, a current account deficit emerges and, later, a recession sets in, as documented in various studies. With endogenous capital accumulation, numerical simulations show that the model can also predict a boom in investment. This paper is a product of the Economic Policy and Poverty Reduction Division, World Bank Institute. The authors may be contacted at pagenor@worldbank.org and lpizzati@worldbank.org.

Aggregate Demand --- Assets --- Capital --- Capital Markets --- Consumption --- Currencies and Exchange Rates --- Debt Markets --- Devaluation --- Economic Theory and Research --- Elasticity --- Elasticity Of Substitution --- Emerging Markets --- Exchange --- Finance and Financial Sector Development --- Financial Literacy --- Goods --- Interest --- Investment --- Macroeconomics and Economic Growth --- Money --- Open Economy --- Private Sector Development --- Production --- Recession --- Stock --- Supply --- Wages --- Wealth

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Indian gross domestic product per capita increased rapidly between 2001 and 2006 in a climate of increasing services trade, with the export-oriented services sector responsible for rising shares of growth in gross domestic product. Due to its contribution to aggregate economic growth, there is a great need for empirical examination of the distributional consequences of this growth, especially in light of the challenges in obtaining theoretical solutions that can be generalized. This paper fills this gap in the literature by using a global simulation model to examine how sensitive factor incomes across different industries may have been to the historical changes in India's services exports and imports, and provides insight on the distribution of the national income growth attributable to the expansion of the services industry. Rent on capital in the service sector and wages of all workers would have increased as a result of greater services trade in this period, while income from capital specific to agriculture and manufacturing would have declined. The factors involved with the urban-based services sector may thus benefit from the services trade growth, while the total factor income involved in rural agriculture may decline.

Agriculture --- Economic Theory & Research --- Elasticity --- Elasticity of substitution --- Emerging Markets --- Equilibrium --- Exports --- GDP --- GDP per capita --- Gross domestic product --- Gross domestic product per capita --- Growth theories --- ICT Policy and Strategies --- Information and Communication Technologies --- International Economics and Trade --- Labor Policies --- Macroeconomics and Economic Growth --- National income --- Private Sector Development --- Product differentiation --- Production functions --- Real gdp --- Social Protections and Labor --- Statistical analyses --- Telecommunications --- Trade barriers --- Trade Policy --- Transactions costs --- Value added --- Wages