A recent study by Orji, E. C. (2024) titled “Economic Development Implications of Taxation and Fiscal Deficit in West African Monetary Zone (WAMZ)” published in the International Journal of Social Sciences and Management Research reveals that tax revenue boosts employment, while external debt and debt servicing hinder job creation, emphasizing the need for efficient fiscal management in WAMZ.
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Tax revenue boosts employment, while external debt and debt servicing hinder job creation, emphasizing the need for efficient fiscal management in WAMZ.– Orji, E. C. 2024
The study explores the economic development implications of taxation and fiscal deficits in the West African Monetary Zone (WAMZ), with a focus on employment trends in Nigeria, Ghana, The Gambia, Liberia, Sierra Leone, and Guinea from 2005 to 2020. It examines how tax revenue, external debt, and debt servicing influence employment rates in these countries.
Findings indicate that tax revenue positively impacts employment by providing governments with the necessary funds to invest in critical, job-generating sectors, thereby enhancing fiscal sustainability. However, external debt has a negative effect, as long-term borrowing does not translate into meaningful job creation. Additionally, debt servicing—repayment of interest and principal—further hampers employment by diverting financial resources away from productive investments. The study also highlights a unidirectional causal relationship between tax revenue and employment, reinforcing its importance in job creation.
How the Study was Conducted
The study adopted an ex post facto research design, utilizing secondary data from reputable sources such as the World Bank and OECD Statistics. Covering the period from 2005 to 2020, the analysis focused on the six WAMZ member countries—Nigeria, Ghana, The Gambia, Liberia, Sierra Leone, and Guinea—without any direct manipulation of the data.
To examine the relationship between tax revenue, external debt, debt servicing, and employment, advanced statistical techniques were employed. The Panel Non-linear Autoregressive Distributed Lag (NARDL) model was used to capture asymmetric effects, while the Pedroni residual-based cointegration test established long-term relationships among the variables. Additionally, causality tests determined the directional influence of tax revenue on employment. Descriptive statistics and unit root tests ensured data reliability and integration properties. The findings revealed mixed integration and significant long-term relationships, highlighting the complex dynamics between fiscal variables and employment in the WAMZ region.
What the Authors Found
The study found that tax revenue positively influences employment by enabling government investment in key sectors, while long-term external borrowing and debt servicing negatively impact job creation by diverting resources from productive investments. Additionally, tax revenue exhibits a unidirectional causal relationship with employment, underscoring its role in shaping employment trends. The findings emphasize the need for improved tax revenue generation and efficient allocation of borrowed funds to enhance fiscal sustainability and employment opportunities in WAMZ countries.
Why is this important
Policy Guidance: The study offers insights for policymakers on optimizing tax revenue and effectively managing external debt to create jobs and improve fiscal sustainability.
Addressing Unemployment: With unemployment being a persistent challenge in WAMZ countries, the study highlights actionable strategies like increasing tax revenue to invest in sectors that can generate employment.
Debt Management: The findings expose the adverse effects of external borrowing and debt servicing on employment, emphasizing the need for responsible debt management and better allocation of borrowed funds.
Economic Growth: By focusing on employment as a proxy for economic development, the study underscores the critical role of fiscal policies in achieving sustainable growth in developing economies.
Regional Relevance: It specifically addresses the unique financial and economic conditions of WAMZ countries, making the recommendations particularly applicable and impactful for the region.
What the Authors Recommended
- The authors recommend that governments should implement policies to enhance tax collection and management. Increased tax revenue can provide the financial resources needed for investments in job-creating sectors.
- External borrowing should be directed toward productive ventures that directly contribute to economic development and employment generation. Mismanagement of borrowed funds has been identified as a significant hindrance.
- Policymakers need to adopt responsible debt management practices to reduce the negative impact of debt servicing on employment. This includes ensuring that borrowed funds are used efficiently and not diverted to unproductive expenditures.
- In addition, the study advocates that strengthening fiscal policies to ensure financial stability and economic growth while minimizing reliance on debt is critical.
In conclusion, the study underscores the critical role of tax revenue in fostering employment and economic development within the West African Monetary Zone (WAMZ). While taxation provides governments with the necessary resources to invest in job-creating sectors, excessive external borrowing and debt servicing hinder employment growth by diverting funds from productive investments. To achieve sustainable economic progress, policymakers must prioritize efficient tax collection, responsible debt management, and strategic allocation of financial resources. Strengthening fiscal policies will not only enhance employment opportunities but also promote long-term economic stability in the region.
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