Many governments commit significant portions of their budgets to building and maintaining transportation infrastructure. For example, nearly 20 percent of the money lent from the World Bank to developing countries is earmarked for transportation infrastructure projects, which is more than education, health and social services combined. Some of these projects, such as the Interstate Highway System in America or the National Trunk Highway System in China, are breathtaking achievements of engineering. But the costs of projects like these are also breathtaking, and their economic benefit is often unclear. Recent research finds that the economic benefits of transportation infrastructure investment can be significant.
The majority of the world’s population lives in low-income countries where market failures are pervasive and governments’ budgets are tight. Research in development economics addresses the following questions:
• What keeps individuals in poverty?
• What keeps firms small and unable to expand?
• Which policies have been effective at enabling resources to flow more easily to their most productive use, thus raising incomes?
• What approaches have been effective at improving government performance, e.g. through incentives for agents delivering public services and the design of the tax system?
Tax collectors in developing countries collect far less tax revenue as a share of gross domestic product than tax collectors in higher income countries. In many of these developing countries, tax officials have discretion in assessing, enforcing, and auditing taxes. In addition, they earn relatively low wages with fewer rewards for good performance, allowing for the possibility of collusion with taxpayers. In the case of property taxes, officials may accept payments in exchange for leaving properties off the tax rolls, granting inappropriate exemptions, or assessing properties at a lower rate, all of which lead to lower revenues for the state.
Developing economies are typically characterized by low tax revenue and widespread tax evasion. This research shows that in such environments, it can be better to tax firms based on turnover rather than profits: while turnover taxes are known to distort production decisions, they are more difficult to evade than profit taxes. Analyzing administrative tax records from Pakistan, the study shows that the use of production-inefficient turnover taxes sharply reduces tax evasion and increases tax revenue.
Migration from rural areas of India to the city is surprisingly low compared with other large developing countries, leaving higher paying job opportunities unexploited. This research shows that well-functioning rural insurance networks are in part responsible for this misallocation in the labor market, creating incentives that keep adult males in the village. Policies that provide private credit to wealthy households or government safety nets to poor households would encourage greater rural-urban migration but they could also have unintended distributional consequences.
Many fear that climate change will have severe effects on the global economy, particularly through the threat to food production and farmers’ earnings. This research suggests that much of the potential harm could be avoided if farmers can switch their crops in response to changing relative yields.