Continued

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Increased GDP is then the joint result of substantial increases in nonagricultural production coupled with big declines in imports. The increase in the price of imports and consequent decline in quantity of imports is more than counterbalanced in the production of non-agriculture by the influx of labour from agriculture. However, this labour is now cheap, and hence profits increase.

Note the sharp increase in tax revenue despite the fall in export and import volumes. The reason is the substantial increase in implicit tax revenue from rationing. The net result is an increase in the overall surplus of the economy, which is achieved largely with the increased impoverishment of workers.

Table 15 presents the response to a 10 percent increase in the export tax rate for the least developed economy of our sample (number 11), under different initial levels of export tax. The noticeable thing is that at higher initial agricultural tax rates, further taxation yields smaller further amounts of surplus, while it leads to declines in GDP. The simulations are repeated for a more developed LDC (number 12) in Table 16. It is apparent there that there is a level of initial export tax above which further increases in export taxation lead to declines in the generated surplus. By comparing Tables 12 and 16 this initial level is similar in both cases, namely between 70 and 75 percent.

The overall conclusion then is that taxation supplemented with import rationing will lead to more surplus for a given economy, but at higher domestic welfare cost.

Table 15 Percent response to a 10 percent increase in the export tax rate under import rationing for a least developed LDC (number 11) under various initial export tax rates

Table 16 Percent response to a 10 percent increase in the export tax rate under import rationing for a more developed LDC (number 12) under various initial export tax rates

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