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OECD Criticizes Latin American Countries' Tax Policies

by Leroy Baker, Tax-News.com, New York

09 November 2007


Latin American countries need to invest more public funds in health, education services, infrastructure and innovation, but to afford this they will have to make major changes in the way their tax systems operate, according to the OECD’s newly published Latin American Economic Outlook.

The OECD urges Brazil and Mexico to improve the efficiency of public spending. Both Brazil, which collects tax revenues equivalent to around 35% of its GDP, and Mexico, where tax revenues amount to only 15% of GDP, score badly in such areas as access to basic services like clean water and electricity.

Fairer systems of taxation could mean ending some of the special tax exemptions that currently feature in many regimes, while increasing the share of revenue from direct taxation, notes the Outlook.

At present, surveys show, fewer than one in four Latin Americans believes that money from taxes is being well spent. With more than 200 million people – nearly 40% of the population – living in poverty, the region has the highest levels of inequality of any region in the world. Stronger economic growth is likely to help raise fiscal revenues, but Latin American countries need to spend these revenues in a more effective and fairer manner, in order to reduce poverty and maintain citizens’ trust in democratic systems.

Presenting the report at a conference in Santiago de Chile, OECD Secretary-General Angel Gurría noted that Latin America is becoming an increasingly important player in the world economy. However, he stressed the need for further economic reforms in order to underpin improved prosperity.

“Latin America has chosen democracy and the market economy, and the region is benefiting from its progressive insertion into the global economy,” Mr. Gurría commented. “However, there are still important challenges to be overcome in order to consolidate economic growth, social justice and democratic governance.”

Publication by OECD’s Development Centre of its first-ever report on the economic outlook for the region follows a decision by OECD countries in May to engage more closely with major emerging economies world wide. Mexico is already a member of OECD, and Chile has been invited to open membership negotiations. In parallel, OECD has launched a process of “enhanced engagement” with Brazil and other major emerging economies such as China, India, Indonesia and South Africa, with a view to strengthening mutual links and possible future membership.

In addition to fiscal policy, the Latin American Economic Outlook reviews other aspects of economic policy such as pension reform. Noting that Chile and several other Latin American countries have been at the forefront of pension reform, it observes that policy changes have so far failed to raise the region’s relatively low levels of saving. In this context, it suggests that lifting restrictions on the investments of pension fund administrators and strengthening governance requirements could help to encourage longer-term investment in areas such as housing, infrastructure and innovative technologies.

Reviewing the impact of the rapid rise of China and India in the global economy, the Latin American Economic Outlook notes that many Latin American countries, as exporters of raw materials, stand to gain considerably from growing Indian and Chinese demand. The downside is that the region’s economies risk increasing their dependence on a few commodities at the very moment when they should be diversifying. Moreover, Latin American companies need to maintain their competitive edge in major markets where they have a geographical advantage, as is the case for Mexican and Central American enterprises in relation to the United States. This will require investment in telecommunications and transport infrastructures and measures to encourage innovation and promote a sounder business environment.

The Latin American Economic Outlook is available in English, French, Spanish and Portuguese. For further information about the report see www.oecd.org/dev/publications/leo


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