Resource misallocation causing low productivity in developing countries: Report
As Zimbabwe seeks to optimize revenue collection from the informal sector, a new research from the International Monetary Fund (IMF) has tipped that lower compliance costs and stronger enforcement can reduce the unfair cost advantages informal firms enjoy, to make room for more productive and tax compliant firms to increase their market share.
The paper says a number of measures can employed to redress the anomaly. “Measures include reducing compliance costs and promoting compliance by ensuring that taxpayers are registered; that they are knowledgeable regarding their tax obligations and that reporting is accurate”, said the IMF’s Fiscal Monitor analytical chapter released today.
The report also said the productivity of firms in low income developing countries has been declining since 2005, as measured by total factor productivity, due to resource misallocation and poor use of labour and capital.
The report says the resource misallocation manifest itself in a wide dispersion in productivity levels across firms, even within narrowly defined industries. “This dispersion reveals that some businesses in each country have managed to achieve high levels of efficiency, possibly close to those of the world frontier in their particular industry, which in turn implies that existing conditions within the county can be compatible with higher levels of productivity”, says the report.
It further argues that countries can reap more total factor productivity gains from reducing resource misallocation and allowing other firms to catch up with the high productivity firms in their own economies.
The report further postulated that upgrading the design of tax systems can help countries chip away at resource misallocation by ensuring that firms’ decisions are made for business and not tax reasons. In Zimbabwe, there have been a number of scenarios whereby taxes were imposed with an apparent intention of just mobilising more revenue for the fiscus without considering the impact on business performance and viability.
In February, for instance, government imposed VAT on some basic commodities in a move which saw prices going up sharply, resulting in the tax being reversed after a few weeks. Last week, the taxman also had to reverse the tax it had imposed on tobacco farmers without tax clearances after farmers complained that the size of the tax was just about equal to their margins.
“Government can eliminate distortions that they themselves have created. Government should seek to minimize differentiated tax treatments across assets and financing. This approach would help tilt firms’ investment decisions toward assets that are more productive, rather than more tax-favoured”, said the report.
“In emerging and low income developing countries, stronger tax administration could help reduce the unfair cost advantage enjoyed by informal firms that underreport their sales to tax authorities”, it added.
The report also opined that audit plays a key role in promoting accurate reporting, including by encouraging higher declarations from firms that are not audited. “However, audit is more effective when it is risk based and when auditors are well trained”, it added.