Tying governments' hands in commodity taxation

Abstract

In the 1970s, taxation of 'windfall' profits from primary products and intervention in trade and production tempted governments into expansionary fiscal policies, whilst stifling the private sector and depressing growth. However, the experience of the mid-1990s coffee boom has so far been more favourable: those African countries which liberalised and left a large share of the 'windfall' with the private sector, and which committed themselves to fiscal austerity via adjustment programmes, have shown better results in terms of fiscal stability, private sector responses and economic growth than countries which did not reform. These findings suggest that constraints on discretionary government policies are desirable, and that domestic institutions and international commitments could serve this purpose.