Lessons Learned from the United States and India

Abstract

We started the book by attempting to answer several questions. First, using an analytical framework, we studied the impact of tax incentives on the economies that adopt them, adopting a general equilibrium framework from the standard literature on the subject. Knowing completely well that it is impossible to isolate the incidence of any tax cut solely to the local economy, we made an attempt to understand if such incentives merely redistribute employment, if a perspective is taken, that extends beyond the local economies adopting them. We found that such redistribution may not be zero-sum, even in a general equilibrium context, provided the redistribution of firms and jobs occurs towards the most distressed regions. These findings are based on the analytical framework and the EZ programmes of two large Midwestern states of the United States, which adopted EZs as soon as the concept was introduced in the USA, and have been controversial for various reasons. Regarding the benefits and costs of regional development, based on the empirical evidence, this work suggests that the net benefits from jobs are more than the costs of generating them, if certain conditions are met:

• (i) The jobs are created in high-unemployment areas;

• (ii) The jobs have to be well-paid, implying a certain level of skills;

• (iii) Careful targeting of labour-intensive firms that can create skilled jobs without the offer of generous tax incentives.