Using Surveys of Business Perceptions as a Guide to Growth-Enhancing Fiscal Reforms
ZEW Discussion Paper No. 13-012 // 2013Good policy advice, in addition to requiring sound theoretical frameworks to identify growth-enhancing fiscal reforms, also needs a reliable evidence base. Much of this evidence base has traditionally come from applications of econometric methods to various fiscal aggregates. However, concerns have recently been raised over the merits of this type of evidence for policy reform advice in practice; see, for example, Rodrik (2005), Hausmann et al. (2008a). It seems therefore useful to question whether business perception data included for instance in the World Bank Enterprise Surveys (WBES) are a useful additional source of information to guide policy makers’ choices. These surveys contain ratings of various factors regarded as ‘obstacles’ or ‘constraints’ on firms' growth performance as identified by firm owners or managers. With firms' investment decisions likely to be an important driver of aggregate economic growth, and these investment decisions likely to be affected by firms' perceptions, such perception indicators could potentially be a valuable source of information on actual growth constraints. Indeed, a number of authors have recently argued over the merits of such business survey information as a reliable identifier of actual constraints, and the policy reforms that might follow.
The objective of this paper is to examine whether, and when, subjective perceptions of firms may be a useful source of information to help identify growth-enhancing fiscal reforms. Specifically, adopting the standard theoretical framework for the analysis of fiscal policy and long-run growth, we demonstrate that firms' perceptions can be expected to suffer from particular biases. We show that while these biases can be expected to be important for some fiscal policy reform options, they are not for others. This suggests that it is important to distinguish between the specific contexts in which such business perception information is likely to offer reliable or unreliable guidance to growth-enhancing policy reforms. The essence of our argument is that, in part because of the way business survey questions are constructed, firms’ responses can be expected to focus on the direct effects of policies alleviating particular constraints that they see as obstacles, while ignoring the externalities, or indirect effects of these policies. We exploit this assumption to model firm perceptions of fiscal policy-related constraints including taxation and public expenditures taking two different forms: flows of public services and stocks of public capital.
The paper makes two contributions. The first is to evaluate, based on a class of endogenous growth models, whether business perception data could be useful in identifying the optimal direction for fiscal policy reform. We show that, regardless of model parameters, it is likely that firms perceive the (distortionary) tax rate as a more severe constraint than public service-related constraints, which in turn are likely to be perceived as more severe than public capital-related constraints. Firms view fiscal constraints in this order even when taxes and spending are set at their optimal, growth maximizing values (i.e. where changes to any fiscal parameters would result in declines of the growth rate). However, this framework also predicts that for comparisons of fiscal constraints involving similar types of public spending (e.g. between two public service-related, or two public capital-related, spending categories), business perception data do not suffer from such systematic biases vis-à-vis optimal policy responses.
The second contribution is to compare actual business perception data from the World Bank Enterprise Surveys, and in particular how firms rank fiscal policy-related constraints, with the ranking predicted by the endogenous fiscal-growth framework. We find that the WBES rankings of fiscal policy-related constraints closely match those predicted by the theoretical models.
Misch, Florian, Norman Gemmell and Richard Kneller (2013), Using Surveys of Business Perceptions as a Guide to Growth-Enhancing Fiscal Reforms, ZEW Discussion Paper No. 13-012, Mannheim.