Africa’s Growth Trap: A Political-Economy Model of Taxation, R&D and Investment

Abstract

Why do so many African governments consistently impose high tax rates and make little investment in productive public goods, when alternative policies could yield greater tax revenues and higher national income? We posit and test an intertemporal political economy model in which the government sets tax and R&D levels while investors respond with production. Equilibrium policy and growth rates depend on initial cost structure. We find that in many (but not all) African countries, low tax/high investment regimes would be time-inconsistent. For pro-growth policies to become sustainable, commitment mechanisms or new production techniques would be needed.