Public Versus Private Savings Rates in LDCs: Please Effects in recent development

Please Effects, first noted in the 1950s, refer to more vigorous tax efforts having an adverse effect on overall savings in LDCs. It is argued here that, by the 1980s, the reforms imposed by conditionality combined with a less forgiving world economy should have led to significant improvements in public savings performances such that Please Effects would no longer be a widely observed phenomenon, and that perhaps even 'reverse' Please Effects might now be observed. Based on a broadly specified cross-country life cycle regression model, and samples ranging from 89 to 93 LDCs, no evidence whatsoever was found for Please Effects in both the 1980s and the 1990s. In fact, our results provided clear evidence for just the opposite, although for tax policy purposes the reverse Please Effects were not found to be especially large. Savings rates would typically rise about 3% for a 10% rise in the tax/GDP ratio. It was concluded that those who would argue for a greater public role in economies that are clearly savings deficient may once again have a case if, as our results indicate, increased taxation to fund social capital accumulation is not at the expense of savings overall.