Ideas for growth session 3: State Capabilities

Johannes Spinnewijn (LSE) kicked off the state capabilities session by presenting his findings from his paper, ‘Production vs Revenue Efficiency with limited Tax Capacity: Theory and Evidence from Pakistan’. His research paper highlighted that existing literature on optimal design of tax systems is not applicable for developing countries, where perfect tax enforcement does not exist. With enforcement gaps, tax evasion occurs and introduces a trade-off between production efficiency and revenue efficiency. In Pakistan, a minimum tax scheme was implemented where firms are taxed either on profits or turnover, whichever liability is larger, giving rise to a jump in tax rates and tax base at a certain threshold of profit. Exploring Pakistan’s administrative tax data, Spinnewijn found significant and real incentives for firms to bunch around the minimum tax discontinuity. Hence this paper argues that the large estimates of evasion responsiveness in Pakistan justify tax policy architecture that deviates from the productive efficient profit tax theory.

Oriana Bandiera (LSE) presented her research paper ‘Do gooders or doctors?’ which studies the optimal strategy to recruiting, motivating and retaining public agents, in the context of community health assistants (CHAs) in Zambia. There is severe shortage of health staff in Zambia and her research evolved directly from demands by the Ministry of Health to address this gap. She advertised for CHAs with 2 different advertisements – one to attract individuals interested in serving their local communities (community mission) and another designed to attract individuals interested in a career in the civil service (career mission). CHAs were trained centrally at the ministry, thereafter sent out to their local villages to be CHAs. Bandiera and her team found that CHAs hired under the advertisement of the community mission made 20% less visits to their communities, whilst a stronger performance was found by the CHAs recruited under a career mission. There were no differences in retention rates of both groups after the first year. Although there did not seem to be a trade-off empirically between community attachment and skill levels, Bandiera caveats that the community mission CHAs may perform better on unobservable aspects.

Imran Rasul (UCL) shared his research titled ‘Management of Bureaucrats and Public Service Delivery: Evidence from the Nigerian Civil Service’, exploring the effects of managerial practices on public service delivery. This study utilised data on 4700 Nigerian public sector projects, responsible public sector organisations as well as independent assessments of project completion rates. Professor Rasul’s team also conducted a survey to elicit management practices from public sector officials within the responsible public sector organisations involved. They found that a greater degree of autonomy is associated with significant increases project completion rates, whilst a greater degree of performance related pay and relevant monitoring is associated with a decrease in the rate of project completion. This was found to be particularly binding in projects with higher complexity, where it is was more difficult to align incentives to the aim of projects.