INTRODUCTION TO VALUE ADDED TAX VAT

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REFORM Project, USAID/India
Workshop on Macroeconomic Analysis and Policy
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Globalization The New Economic
OrderPresentation byDr. Pawan K
AggarwalDeputy Chief of Party and Senior Advisor
(Tax Policy)REFORM Project, USAID IndiaNew
DelhiWorkshop on Macroeconomic Analysis and
Policy Mo3-PKA-Jha-New Eco Order
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Coverage

• General Agreement on Tariff and Trade GATT
  (1947-1995)
• World Trade Organization WTO (since 1995)
• Washington Consensus (since 1989)
• Concluding remarks

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GATT (1947-1995)

• GATT was established in 1947 to oversea
  international trade with a view to create an
  environment of free trade
• GATT negotiations were conducted in sessions
  referred to as Rounds
• GATT held 8 rounds of negotiations
• From the first in 1947, through the Uruguay round
  of 1986

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GATT (1947-1995)

• The main achievements of the first 7 rounds are
• Reduction of tariff rates among industrial
  countries
• From an average of 40 to 5
• 9 of the 10 disputes that were referred to GATT
  were settled satisfactorily, discreetly, without
  publicity
• The volume of trade in manufactured goods
  multiplied 20-fold

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GATT (1947-1995)

• The Uruguay round (1986) Its main achievements
  are
• Further reduction of tariff rates in a phased
  manner
• Evolving new international rules for
• Trade in services and agriculture, and
• Protection of intellectual properties
• Agreement for phasing out multifiber arrangement
  covering textiles and clothing
• Establishing antidumping laws

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WTO (since 1995)

• On 1 January 1995, WTO replaced the GATT
  Secretariat
• This replaced the practice of periodic rounds by
  a permanent process of reviewing the rules of
  international trade
• By February 1997, there were 129 WTO
  member-countries
• In addition, 31 countries had requested for
  membership
• India is member of WTO

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WTO (since 1995)

• In February 1997, there was a major trade and
  investment liberalization break-through
• 70 countries made an agreement that will cover
  95 of the worlds telecommunications business
• It ends state run monopolies and lifts
  restrictive regulations
• It was expected to
• Lower consumer costs
• Expand telephone service area
• Improve access to internet and satellite services

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Washington consensus (since 1989)

• It is a package of 10 reform proposals believed
  to be developed for promoting economic growth in
  Latin America
• It was first presented by John Williamson in
  1989, and expected to be adopted in 1989
• The reform package was also summarized by the
  World Bank in its year 2000 Poverty Report
• The package is based mainly on 3 ideologies
• Macroeconomic discipline
• A market economy
• Openness to the world (e.g., in respect of trade
  and FDI)

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Washington consensus (since 1989)

• The reform proposals are
• Fiscal policy discipline
• Primarily to check large deficits
• Redirection of public spending
• Focus on pro-poor spending
• Spending on education, health and infrastructure
• Tax reform
• Broad tax base with moderate tax rates

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Washington consensus (since 1989)

• The reform proposals are
• 4. Interest rates
• Should be market determined
• Positive (but moderate) in real terms
• 5. Competitive exchange rates
• Trade liberalization
• Replacement of quantitative restrictions with low
  and uniform tariffs
• Openness to foreign direct investment
• Technology, prices, growth

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Washington consensus (since 1989)

• The reform proposals are
• Privatization of state enterprises
• State monopolies, efficiency
• Brings benefits when done properly
• Transfer of assets to privileged elite for a
  fraction of their true value needs to be avoided
• Deregulation
• Abolition of regulations that impede entry or
  exit
• Regulations designed for safety or environmental
  reasons to continue

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Washington consensus (since 1989)

• The reform proposals are
• Legal security for property rights
• This was primarily about providing the informal
  sector with the ability to gain property rights
  at acceptable cost

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Washington consensus (since 1989)

• Towards adoption of the Consensus
• In the early 1990s, many countries, especially in
  Latin America, attempted to implement an agenda
  similar to the Consensus
• Argentina, Bolivia, Brazil, Chile, Colombia,
  Costa Rica, Dominical Republic, Ecuador, El
  Salvador, Guatemala, Honduras, India, Mexico,
  Morocco, Nicaragua, Paraguay, Peru, Tunisia,
  Uruguay, Zambia

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Washington consensus (since 1989)

• Towards adoption of the Consensus
• North American Free Trade Agreement (NAFTA)
• The three North American countries (US, Maxico
  and Canada) agreed to gradually phase out or
  sharply reduce tariffs on foreign goods
• A policy perfectly in line with the ideals of the
  Consensus
• US President George W. Bush continues to support
  NAFTA

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Washington consensus (since 1989)

• Towards adoption of the Consensus
• Dominican Republic-Central America Free Trade
  Agreement (DR-CAFTA)
• US administration is currently negotiating an
  agreement similar to NAFTA with the Dominican
  Republic and Central America
• Countries currently opposed to the consensus
  include
• Argentina, Brazil, Cuba, Venezuela

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Washington consensus (since 1989)

• Achievements/Failures
• Most Latin American countries continue to
  struggle with high poverty, unemployment/underempl
  oyment, and low growth
• Countries such as El Salvador and Uruguay have
  shown some positive signs of economic development
• Chile has been a success story
• However, according to Joseph Stiglitz, Chile
  success story owes a lot to the state ownership
  of key industries and currency interventions
  stabilizing capital flows

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Washington consensus (since 1989)

• Critical evaluation
• It is not a strategy to avoid crisis
• Economic growth effected due to series of crisis
  that emerging markets have suffered
• Inappropriate associated policies (not required
  by the Consensus)
• Opening up the capital account prematurely
• Letting money flood in and overvalue the currency

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Washington consensus (since 1989)

• Critical evaluation
• Incomplete set of reform strategies
• Failure to undertake labour market reforms and
  strengthening of institutions
• Excessively narrow objective
• Acclerating growth without worsening income
  distribution
• Birdsall and Torre (2001) gives a set of 10
  reform proposals intended to improve income
  distribution without reducing growth
• This package can be viewed as a complement to the
  Consensus

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Washington consensus (since 1989)

• Critical evaluation
• Western countries that urge liberalization on
  developing countries maintain trade restrictions
  on the goods that developing countries are in a
  position to export to them
• The hypocrisy of Western countries
• Some leftist critics of trade liberalization,
  such as Noam Chomsky and Naomi Klein, see it as a
  way of throwing open the labor market of an
  underdeveloped economy to exploitation by a more
  developed economy

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Washington consensus (since 1989)

• Critical evaluation
• The Consensus is widely held by many economists
  to be a 'suicidal policy' if implemented when an
  economy is weak.
• It might succeed if implemented during a period
  of rapid growth

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Concluding remarks

• A reform package may not suit all countries, or
  at all times, or under all circumstances
• What works under rapid growth might fail under
  crisis
• Reforms ancillary to a reform package could be as
  important as the package itself
• These need to be identified and adopted
• A move towards free trade is unavoidable
• Time and speed need to be determined based on
  circumstances of individual countries

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Concluding remarks

• India is member of WTO and contemplating
• Further reductions in tariff on imports
• Free trade zones such as SAARC
• Rapid growth in inflow as well as outflow of FDI
• Privatization of state enterprises

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Thank YouPawan K. Aggarwal