Will public finance system improvement help economic recovery

In this episode of “Better Innovation,” Global Tax Innovation Leader and host Jeff Saviano interviews Marcello Estevão, Global Director of Macroeconomics, Trade and Investment at The World Bank.

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Marcello Estevão, Global Director of Macroeconomics, Trade and Investment at The World Bank knows the importance and impact of public debt management. In this episode, Marcello takes Jeff through the process of debt intervention for national economies, the role of debt in tax policy making, and how emerging technology can materially enhance public finance (including tax) systems. Marcello also offers some insights on economic development as the pandemic recovery continues.

For your convenience, full text transcript of this podcast is also available.

Jeff Saviano

Hey Better Innovation, this is Jeff Saviano your host. Welcome to the show where we bring to you the leading innovators in the world, and their incredible accomplishments. Today, in our studio, we have Marcello Estevão. Marcello is the Global Director of the World Bank Group's Macro Economics, Trade and Investment Global Practice. He is a leading Economist on the world, he's got such a tremendous body of work, in International Development. I'm recording this introduction just after we finished the interview, he has such a thoughtful point of view on development work, and in particular, the need for appropriate debt management and tax policies to help guide Developing Nations, as they emerge from this crisis. So, if you're interested in a primer on the Macro Economic and Fiscal Police issues that are facing Governments today, I think you're going to really enjoy hearing about Marcello's unique experiences. We worked really closely with Marcello's team at the World Bank. I have to say, I have so much respect for their work, they are making such a huge impact in the world, especially in the fragile economies across the globe. Just one more thing, if you're enjoying Better Innovation, I would really appreciate it if you could take a moment and rate the show on your favorite podcast platform. I think you're going to really enjoy this episode, with Marcello Estevão from the World Bank, here we go.
Marcello, welcome to the show.

Marcello Estevão

Hi, Jeff, thanks for having me.

Saviano

We do quite a bit with your team, uh at the World Bank, Marcello. Let me just start with a special thank you to you for joining us today on the podcast, and also a thank you to your colleague, and one of our key collaborators, Anders Agerskov. He was so helpful to bring you to our Better Innovation audience today. We are just so thrilled to have you on the show.

Estevão

I'm very happy to be here. I mean, our collaboration has been great on tax issues and uh, anyway, it's nice to expand that uh, in this conversation.

Saviano

It has been great. There were some big issues to solve in the world, especially where we sit coming out of this pandemic and we really do enjoy that collaboration. You have such a wealth of experience in international development. I'd love, Marcello, let's start the conversation, if you could tell our listeners a little bit about your path, how you ended up in your role at the World Bank?

Estevão

Yeah, sure. I mean, I have a kind of all of us we have a unique path in whatever we do. In my case, it really is interesting because I come from not very... say, a low middle class, relatively poor background in Brazil, and I haven't, in many ways, benefited from the help of others to get where I am. I mean I studied in this very good, private school in Brazil because of scholarship actually from the Jesuit order and then entering a university with a scholarship down there was for merit, but also a Jesuit university, uh in Rio and uh, and what, what that really showed me is that the importance of public policy and intervention to help people that, you know, who want to do better in life. That really marked me, very much, and it was really kind of a what I do. Since then, you know, did a master, PhD in the US and all that, and... but my first job, it was actually at the Federal Reserve in the research department there. So, in the central bank and I was working there "in North America" even though I was not. At that point, itdid feel to me that I was straying away a bit too much, very focused on economic theory and academic research, um and you know, doing interesting policy work, uh but uh not quite related to, to development, related to helping US do the best in monetary policies as they can. And then, I got an offer to, to join the IMF which I did and there I did a, a lot of different work from working in Europe actually, on the Eurozone and France, Germany and Poland, Belgium, a bunch of those countries. Then I moved to work on Latin America, back on the US and in Canada I was heading a lot of that work during the crisis in 2008. When I suddenly realized that I want to use all that experience uh to work on development, and I asked to be signature chief to Nicaragua, that was more than about 12 years ago. Um, then since then, uh I have my interest on, on development and working with uh emerging markets, have gone up. I worked as deputy minister of finance in Brazil. I worked in the private sector, actually in the US in a hedge fund, but with a focus on how capital movements affect different countries, um and uh after my position in Brazil, I was offered this job as Global Director for Macroeconomics at the World Bank, where I am completely focused on development issues. So, it was a long, it's kind of a long answer, but also show kind of a long trajectory that goes from trying to, to get to the top of the academic thinking on key economic issues, to then converging back to development issues. The World Bank is a great place to do that.

Saviano

It is a really interesting trajectory and, if we could just go back to the very beginning, I'd loved how you started the conversation. Uh I'm just so interested to know; do you attribute your Jesuit background and the teachings to perhaps the focus on international development? Did it start there?

Estevão

Actually, that's actually a very good question because as you know, the Jesuit order is known in some countries — or in many countries — for being kind of intellectuals of, of the church, and uh it may have affected me. I have to confess I don't go to Catholic church now. I actually am, I don't know if it matters, but I actually go to a Presbyterian church now. So, I continue being somewhat uh, uh religious. Certainly, I'm very spiritual in everything I do and the way I look at the world, um but I do think that that has marked me, uh the commitment to... to know think that there is something uh beyond what we do here, but at the same time, that science and the knowledge is crucial for us to do well and uh for society. So, I think that is a very interesting combination and I think, I think you're right. It has... I never thought about that till you asked me, but I think that may have been a link right there.

Saviano

I thought about it, too, just in terms of my own background. The order within the university where I studied, was Irish Christian brothers and also have a commitment to uh development and helping the needy and there have been some connections across these different orders, and so I was just so interested to see if that, if that played a role because that has been such a hallmark of Jesuit principles, is the development work and uh assisting others. So, it's a, as you said, it's a fascinating trajectory, and somewhere along the way, as well, you had a stop where we're located in Cambridge, Massachusetts at MIT, and you did your PhD work at MIT. What do you remember about your time in Cambridge and at the university?

Estevão

It was, was a time of great change and revelation for me because it was the first time... It was the first time I left the country. I, I was raised in... you know born and raised in Rio and uh had left my home state maybe a couple of times in my whole life. It was the first time that it was in a plane, was when I take a plane from, from Rio to Cambridge
Massachusetts, and it was the first time that I'd seen snow. I never seen snow in my life. It was the first time that I interacted in English. I mean, you, when you apply to PhD programs, you have to do an exam, like it's called the TOEFEL. If you're a foreigner you know it's like. So, if you asked me to do an exam, I study and I do the exam. That doesn't mean I know how to order hamburger in a, in a store. Uh so it was a time of great learning. Uh and I'm not talking about just economics and techniques and uh, but life learning. So, my first year at MIT, I would say the economics helped me understand the English at first and then, I mean, after six months to a year, it was like I was back at home and I always had a very, I'll say easy way of adapting to different situations. That's why I could change uh so much in different roles and feel at home. So, I think the, my time in Cambridge, Massachusetts was really a time of, in some sense, rebirth, if you want to call it that. My wife's American, was my classmate there. Uh she's also, she's a brilliant economist.

Saviano

Oh, how wonderful.

Estevão

And uh, you know, uh so I got quite well adapted in the west and it... but it was still with very uh tight roots uh in Brazil.

Saviano

It's hard not to be influenced by the role that MIT has played in technology and we've talked a bit about that in some of work together and collaborations that we have with MIT, that I would imagine that, that when you were on campus, that your focus and your study was on economics, but the long history and contribution of MIT and technology and innovation and all that Kendall Square and that community has to offer, did that impact you in some way, too?

Estevão

Yeah, no actually it's funny that you are mentioning that because when I was there, I remember once I went to, you know, I like, I like swimming so I went to the swimming pool and I was changing clothes in the, in the dressing room and um, so this guy come, came to me and said, oh, so what's your course number? At MIT, they have these numbers for courses. So, I said the number and he said oh okay, I do blah, blah. I don't know this number and I think he was doing engineering something that I, I do more credits than you. So, he was looking down at me because I was in the economics department in an engineering school, which is, which was funny because actually the MIT economics department is, arguably, the best department in the world and, you know, lots of Nobel prizewinners.

Saviano

That is a funny story.

Estevão

So, so, you, you're right. I mean, the, the institute is very focused on, on, on engineering and technology and physics and math broadly, but has this outstanding economics department in the middle of it and sometimes not fully appreciated by the, I'm sure the, the teacher, the professors, of course, appreciate, but the, some of the students don't, but that, that marked me in a way that is I mean this commitment to science, to objectivity, you do see a lot at MIT. Actually, to informality, if I had any issue on a paper that I'm writing, I could knock on the door for a Nobel prizewinner at MIT and the person would say oh, come in. I mean it was much easier. I had much more access there than, say, an average student has to a university professor in Brazil, which is, which is amazing. So, it's uh, it's also a place where uh they have this philosophy, certainly in the economics department that, you know if you work hard and you are able to make in here, believe me, we are going to treat you well and I was always quite well treated. There is sometimes this image of being a place that there are a lot of competition and it's cut-throat and it's actually not all, at least not in the economics department? It's not my experience. I always felt very supported, uh technology all around me. Actually, I found interest in some particular science issue would be there out, you know, outside economics and the economics department, uh incredibly supportive. Uh, so it was a very special experience.

Saviano

It is a very open community and, and now that look to your work and the impact that innovation and digital technologies have on economics — and we're going to get into some of that today but I would suspect that, that the introduction to that that you had and the interconnections of innovation and technology to economics is, is rich on MIT's campus, and it's also rich in your work at the World Bank. Is that fair?

Estevão

I would say that's fair. I mean, uh, um, the World Bank is uh world leader in economic research, certainly in the policy world, with the focus on development, and a lot of the issues involve knowing the science behind the issues. For instance, we are very involved in the macroeconomics of climate change. It's a topic that I put a, a lot of emphasis since I joined the World Bank. You know just there, I mean you need to understand some of the science behind it, and on taxes as you know, there is his whole movement that we are trying to lead uh together with many uh players including EY, on bringing um artificial intelligence to tax administration and so it is quite important to marry good economics to creative thinking, and that involves many aspects of technology. There is no doubt it can make a difference.

Saviano

Let's fast forward to your role as deputy minister in the Brazilian Ministry of Finance and, as part of that role, Marcello, I understand that you were the ministry's representative at a number of international bodies, including the G20. Our research team, our crack research team here on the show tells me that the G20 members account for about 80% of global GDP. How important do you feel the G20 is in shaping the global emergence from the pandemic?

Estevão

You need to go back to the origins of the G20 which was created in the late nineties at first as, you know, other countries then the G7 begin growing and having great importance on the international scene. It took really a life of its own in the sense of being really a bigger deal, in 2008 and 2009 as a response to the crisis. There was a need for a venue where there is close discussion on international economic policy, as governments were trying to coordinate their actions to deal with the, with the great recession. That was a time of great activity, actually, for the G20. It was quite important because a lot, as you know, a lot of the crisis was centered in major financial centers and it was important to understand the spill over to other economies and the private sector also everywhere. Now, if you fast forward to now, I would say that the G20 were kind of... What should be an important venue, certainly to discuss economic policy. My experience there was quite rich where we had to defend and to contribute to the, defend the Brazilian positions and contribute to the global discussions, but it was kind of not, not as I would say, high profile. Now, with this crisis, some of the high profile G20 discussion emerged again, in particular in the debt area as the G20's trying to deal with the fact that some countries, certainly the poorer countries, have been very severely hit by the crisis. They were already in a trajectory of, of debt increases before the crisis for other reasons, and so the G20 served as a venue where people discussing what to do and you probably have heard of the debt service suspension initiative which was a G20 initiative supported by the World Bank and the IMF. It was enacted uh last year, it started on May 1st, 2020, so that was a G20 response, quick response to the crisis and to support countries by allowing the poorer countries, what we call the IDA countries um at the World Bank because they receive IDA which is our grant arm at the World Bank. They receive grants from the, from the World, from the World Bank and very concessionary loans. So, the DSSI allow these countries to postpone debt service payments for a while. So, it's just a postponement type of pause, but it was important because it gave, like, it was... gave some space, fiscal space for countries to continue maintaining uh, you know, their policies or their social policy and health policies. So that was an example where the G20 was, was quite important actually, and it continues to be a relevant venue to discuss all this international.

Saviano

I'm still curious whether that experience, Marcello, that you had at the G20, if that helped inform your current area of interest, one of your areas that you've been writing prolifically about, the inter-relationship of debt management and taxation to help kindle economic growth, especially in fragile nations that desperately need that support. Am I right to make that connection from your work at the G20 to your later interest in this inter-relation of debt management and taxation fueling economic growth?

Estevão

Yes, there is definitely a link there. Of course, the interest started much earlier because as a macroeconomist, I'm very focused on how monetary and fiscal policy can help countries survive crisis and also how they can help countries to develop and to get the higher levels of welfare. So, um, but yes, my experience as G20 deputy for Brazil was important because it kind of informed me about the political discussion, informed about who the main players are, uh getting a personal connection to many policy makers around the world. I do use that in my current work, although it's not in my job description to actually do the... at least in the very front lines, that political connection is really the job of the president of World Bank. But it does inform me, and I think makes me a better economist and a better, say, international policy maker, including as I advise the president and other uh members of senior management about what's the best road to travel in that environment.

Saviano

And our listeners, of course, everyone has a basic understanding of the importance of debt management. We, we all have that appreciation for our own personal and family finances, but also for the organizations that we represent. The World Bank has directly supported many nations to restructure and sometimes helped with relieving debt. I'd love for you to explain, Marcello, for the audience, why you feel debt management is, is so important and especially now as countries are emerging from this crisis and we'd love to hear some specifics as to best practices that you have seen in the importance of debt management and, and how they're actually getting that done.

Estevão

Debt management is quite important because it's part of what I would say the governance of good policy making in any country. So, think about it, there is something that is bigger that comes before debt management, that is the decision that a sovereign government makes on how to use um people's money, um and that decision is a broader decision that basically establishes the strategic use for your resources. First, actually, it establishes how much, you know, how much you need to achieve whatever policy objective you have, um and, and that, that involves tax policy, it involves how you get those resources, how much you get through tax, how much you get through indebtedness, and if you go through tax, the tax system how do you manage the burden on society of that taxation? Uh, so this is a broad, big picture policy of trust. Then, once you make those decisions, there is the issue of how to fund the spending that you plan uh in a way that is the cheapest for society, and here, debt management is quite crucial because um what that is doing is basically saying given my decision, again I've already made the decision how much to get resource from taxes, how much you get the resource from debt, and then within that, how to make that the cheapest way, the most efficient way. So, I think, in particular as countries evolve, it becomes clearer and clearer, the importance of good debt management. Some countries at the low, at the low level of scale of development don't even have a debt management office or, or at least the way we understand a good debt management office. So, depending on what is your position in this particular institutional development, our interactions with the country, our help to the country are different. So, in terms of best... So, I'm saying all this, because in terms of best practices it, it depends where you are in that, say, ruler of debt management. So, debt management office should first of all, the strategy is always a delegation from, say, congress of a country. Congress is ultimately the expression of people's will, but they cannot do everything. They don't have the technical capacity, so they delegate authority to many bodies. On debt management, they undoubtedly delegate to debt management office, which often are under a ministry, say the ministry of finance, or could be the ministry of economy, um to perform the, the best management of, of a country's debt.

Saviano

Right.

Estevão

We have some rules then. They are more technical and I can go over it.

Saviano

Let's bring this to life. That's so, that is so helpful, Marcello. Thank you for that, for that explanation. I think it would be really helpful for the audience to if you could bring this to life and share your perspective on the contrast between perhaps what a country was like before there was intervention, whether it was from the World Bank or from some other uh, other organization intervening and the contrast from what it was like before that intervention and then following the support program. Is there an example of a country that you think that contrast was quite stark?

Estevão

One hard thing about development work is how to do what the economists say, ceteris paribus which was an expression in Latin that says everything else constant what would, what would have happened if you do this, this and that? Because this is counterfactual which in science is quite important and doing a controlled laboratory. Very often, you know, we cannot do this in society. Sometimes economists do that by using statistical techniques and finding ways to identify the exact effect of the intervention and how that intervention changed reality. I, myself, actually when I did it, it didn't work. I was very far from that, those types of techniques using data to have what we say as economists, an identification of the effect of a particular policy. It is hard, but what I can say is, let's put it this way, and I'm quite humble on that, because it's important to be humble on developments . So, if you look at countries like I think Rwanda is a good case in point, which is a country that, you know survived a massive political crisis with humanitarian, with awful humanitarian consequences in the mid-nineties and emerged from it in with the desire to build back institutions and in the last 20 years has done quite well um putting together fiscal institutions and they have a debt management office which works particularly well, certainly for African standards, but, but actually for any standards for a developing country. They do have you know, for debt management we have the back office, the mid office and the front office. It's kind of separate the depths of debt management, depending on what part of the process of that the issues in managing it were, and Rwanda kind of is following that, and, and not by coincidence, they are not doing that badly given all the, all the challenges in terms of debt management that countries are having, particularly because of COVID- 19. So, of course, it's a country that has problems and all that, but then you know, we have a very mature dialogue with them which was not possible 20 years ago. It's a lot due to the authorities. The country authorities all desire to do better. That's why I'm saying it's kind of hard to say, it's the World Bank that did it. You know it's a whole set of uh, of circumstances. Now what I can tell you, is - and that's even more interesting to me. If you look at countries where we are working intensively right now. We are in the middle of it and the countries are in crisis. It's also even more interesting to see how rapidly we can put together a program to help them, and it's quite amazing, humbling to me to see my colleagues at the World Bank make that happen and the two countries that are coming to mind is first Sudan, which is a country that was basically not part of the international financial system. Let's put it this way, let's be very blunt here. And, you know it couldn't borrow from the World Bank, or from the IMF or from other institutions because for decades, for political, given the political situation, and they were basically running tremendous arrears to all of us. Anyway, we started a process, last semester, not that long ago, of bringing Sudan state "back to the fold" but again, thanks to the commitment of the country authorities to change it, to change their position in the world and to improve their institutions. So, we start this program with them and very quickly, in particular after the US took Sudan out of the um state sponsor uh of terrorists list, that was significant, in January. When that was out a bunch of channels opened up for, first, the arrears, Sudan's arrears to the World Bank to be cleared, uh and second, for a whole set of programs to be put in place in record time, um to help um Sudan ease the households who deal with the crisis, and to help with the transition to a better uh managed macroeconomic framework of this process. Who knows, it may not work out, but the difference between six months ago and now, is huge. It's huge. Uh, if everything goes okay, we may in a month or so have a board meeting where basically, uh you know, uh Sudan enters into what they call a HIPC process. So, a process to deal with uh, with the debt, restructure the debt of highly indebted poor countries. It's a process that started in the late nineties and Sudan is one of the last ones. The other one was Somalia, that would be the same. That debt process started last year and to give a third example, it's our work right now in the context of the common framework, which has been led is that G20 initiative that's trying countries beyond the, the debt service suspension initiative that I mentioned before, which was an emergence, an emergency initiative to deal with the debt countries debt service. Now it's trying to do deeper into uh debt problems and but that depends on countries applying to it. The first country applied for this deeper treatment is Chad and they are in the middle of the work with uh contacting all their creditors to help to see if we can find a such a more sustainable solution for Chad's debt problems.

Saviano

So, in that example, then and, and it seems as though effective debt management would include, perhaps, there could be some restructuring or even some relief of the debt. I would imagine that, not to be overly simplistic, but there could also be a review of expenditure, it could be social programs that are offered, or capital expenditure programs as a way to, to manage on the expense side, but you know, let's, if we could, let's shift to a topic, Marcello, that I know is very close to us both, the role that taxes can play in both debt resolution and also spurring sustainable growth. Are there some ways that, that you have seen developing nations boost their tax revenue without hindering growth, and that, of course would be one way of effectively managing your debt as well. Is that is that right?

Estevão

Yeah, you're completely right, and by the way, just to finalize the previous thought, you are completely right also in the sense that all of those programs to deal with that restructuring, for the they come attached to them, programs to help uh raise tax revenues uh without hurting the development and to, to deal with a broader stabilization issue in the country.
So, you are right, it's not just a debt management operation thinking about being creative to get improvement from the private sector, to, to, to restructure the debt. That needs to come with true policy change for the country not to be in the same situation again. It's something that we see over and over, by the way, and it's a big challenge for, for development work, is how to help countries not to get back in the situation where they are over in debt. Now going to the... In that sense, tax policy is fundamental because uh... that nobody... none of the listeners get fooled by that. Debt is repaid by future taxes. Period. Always. No exception. But after I just said no exception, let me, let me talk about the little exception that people have been talking a lot recent. The exception could be in situations where growth, economic growth is faster than the cost of issue and maintaining debt. In that situation, so basically the rate of growth is larger than the interest rate, that all your debt, in that situation, then it is possible that you don't have to raise taxes and then you just roll over debt, or even get more indebtedness, and just the economy grows so much bigger that as a ratio of your resources, that level of debt becomes smaller or, you know, so you don't need to raise those taxes. But these are situations, they're very specific. I don't think they tend to last very long, although we have been living through a period, a long period of very low interest rates. That's a good argument also for countries maybe like the US, although interest rates they need to go up in the US because of inflationary uh, uh worries. Um, but, but that type of thinking doesn't really translate to other developing countries because first, interest rates are so volatile in those countries that you cannot really, you know, kind of bet on, on growth being above interest rates, interest that matters to your country. That's the one that is take the base rate, say, a rate that the US government would borrow in the market, plus some premium that you have to pay because you are a developing country and, you know, uh that's quite volatile. So that type of thinking doesn't work. So, let's go back to the original thought that you do need to pay the debt and that's just paid through taxes.
Now, tax can be understood very broadly. It could be an inflation tax, if you basically don't... do not have a consistent macro framework, but again, an inflation tax is still a tax. So, anyway, a debt issue today needs to be paid at certain point and that's... At this certain point, whenever it is, it comes through taxes. So, tax policy's very important, and the question now is for countries that get in closed debt situation, they cannot issue debt, they cannot rollover debt, then how do you, how do you broaden your tax base without killing growth, and the answers to focus on areas, on bases that are under-taxed and, and, and yet the road map for developing countries is very clear. These are large multi-national enterprises, who benefit from the international tax system and play around, through transfer pricing, by basically booking profits and losses depending on the institution or on the, on the jurisdiction uh level of taxation. So that's one issue. That's a very hot topic now. We just saw... They just have a meeting; they just have a coming up with a support of a minimum tax corporate tax rate around the world. There's a discussion on the levels. You know, should it be 50%, 21%. The G7 came with 50%, the US had, had proposed 21% before. We are part of this debate. We do think that this minimum tax rate is important. The level itself is still, at least for me, it's not quite clear what's the best level. So that's one example for tax base, that is kind of, you know, fleeing your way from... for lack of better expression from the, the hands of uh government authorities in developing countries, to tax paradises to other businesses. So that's... I think that can be done. That can be... So that's more about re-jigging tax um, tax liabilities across regions. Then there are other, other, other tax bases. It's remarkable how little property and wealth is taxed in developing countries. It's basically not taxed, to be very blunt. So, if you look at the share of, say, real estate taxes in OECD countries, and by OECD countries, I'm talking about the richest economies in the world, uh it's much larger than in developing countries and they are... that has many... By the way, I don't mean it's, it's major. It's still other types of taxes comprise a larger share of revenues in rich countries, but still, you have real estate house tax, it has a perceptible chair and you can barely see in your chart for developing countries. So that's another base that should be taxed and can be taxed. Then there is this, the whole other base, tax base that here you could be a way to get revenues in the short term, but how actually what the policy makers like to do, is to ultimately to destroy that base. What I mean is, there are taxes that you want to impose now that you need help to raise revenues, but the objective of imposing those taxes is really to change behavior, and here, I'm talking about healthcare taxation, or taxation on, on products that effect health that has implication for public health. So, taxation on tobacco consumption, sugary drinks and alcohol drinking, so, which is okay for people to consume, but excess consumption of those products has a public health issue, which is what the economists call an extra night for society that needs to be incorporated. So, those, the same thing with, with carbon emission. So, those bases uh can provide resources in the near term, now or even in the long term, but the idea is to change behavior. So, make that base smaller. Uh, but anyway, so I think that's the key, um to answer your question, is to find the bases that are under-taxed, not to over-tax the base that already is contributing a lot, and you can play with it. We just came up with a paper, and I'm actually writing an article based on that, that shows that revenue neutral, environmentally friendly tax reform, are actually an expansion area, because a green tax, or let's call it a guzzling tax, whatever, they actually have a small impact on economic activity and growth, then a tax aimed at labor. So that goes straight into the, the payroll. So, you can think about introducing a carbon tax, while at the same time reducing payroll taxes and at the end, you have a positive impact on economic activity. You affect, you affect uh, uh behavior, because you effect the people's incentive to pollute, so let's call it pollution for now, and uh, and you are reducing the distortion that a labor tax introduces. So, of course, there is a whole set of political economy issues on doing this and we can talk about that.

Saviano

Marcello, thank you for that, and we started this conversation with the interplay of tax policies to debt management and, and certainly as you're highlighting, sound tax policy is complicated and it involves a prediction of future economic growth and activity that will produce the tax receipts that, that the government needs and um, it was also great to hear your explanation about sometimes tax policies and taxes are used to influence behavior. These are devices that can affect behavior. You provided one example of carbon taxation, and we've explored on the podcast in the past, great example of this in British Columbia, where a carbon tax decreased the consumption of fossil fuels and had a real positive impact on the environment. Uh, talk about the link between tax policy and sustainability and the success of taxes like the one in British Columbia. Are you a proponent of the carbon tax and the effect that it could have on the environment?

Estevão

Yes, I am. I do think it's important. I actually, uh, let me even take a step back. Um, the climate discussion that you are having now in the world, uh is an existential discussion. So, uh, like a, you know as a senior staff in a development institution, of course, I mean, I care tremendously about distribution issues, growth issues. They are, they are fundamental for development. Um, you know, the one of the monikers at the World Bank is "end poverty" and that is, that's, you know, our mission. Having said that, we need to have a country. So, the climate discussion is now front and center in development and here at the World Bank in particular. So, and a key mechanism to effect behavior, uh and to minimize carbon emissions in the atmosphere is to um, is to uh introduce a way to price the activities that are doing those emissions. We do find that carbon taxation's a very efficient way of doing this, a very simple way of doing, but there are other ways of doing, like trading cap systems and which actually it can, it can in some sense, um converge to a tax, to basically a tax, depending on parameters. So, I think of both as in a very similar way, but depending on institutional arrangements and people's preference, you can go for a carbon taxation or for a cap in trading system. I think sometimes it's easier for people to understand, oh if you cap the emissions, that's it. You cap the emissions, the impact is right there, but of course there is a price that comes with that cap that can be mapped into some notion of tax, because though the right to emit can be straighter in the market, and there is a price to that. So, there is a, there is a, a mapping issue. I tend to think that carbon taxation is easier to implement and people, oh but how do you know if it's going to be effective? You're affecting prices because quantities move when prices move. Now, for the carbon taxation to be even more effective, it needs to come together with other points and measures, including regulation, standardization of what is a polluting activity, what is not. It helps to have uh green bonds also. So, because see what, what carbon taxation is doing, it's raising the cost of let's call it dirty projects. So, by consequence, it's lowering the relative cost of cleaner projects. Now, if on top of that you issue a bond that is focused on financing those projects, actually the returns to investors are going to be higher in cleaner projects, because you are basically pricing the dirtier projects. So, so carbon taxation is, can be a powerful tool to affect incentives, but at the same time, to be more effective it needs to come together with a bunch of other policy interventions and, and they tend to kind of potentialize each other.

Saviano

Yes, and taxes alone, and taxes alone are just not enough and it's hard to argue, isn't it, Marcello, with the, the impact of a carbon tax like the one in British Colombia that... and I think most, most people perhaps may not appreciate that, that that particular taxing program was revenue neutral. That the government actually, actually gave the, the tax revenue back to the citizens in the form of tax relief in other areas. So, it, it had the impact and the result of reducing fossil fuel consumption and clear contrast between consumption before and after the tax, and it didn't raise a dollar of additional revenue. On a net basis, they, they gave it back to the consumers, and I think that was a, a critical element of the tax to sell it, to the extent that the government needs to sell that particular tax program to the citizens, at least it's my own opinion that the revenue neutrality of that was important. Would you agree with that?

Estevão

I think, I think it was definitely an interesting way of doing public policy and actually is an example of what I just said, that you can actually have... you can price those activities like carbon emission, and at the same time, kind of do something else in the other part of your tax system, that reinforces your growth objectives. So, British Columbia, responded to the 2008 recession by shifting the tax burden from labor and corporate income, to carbon emissions, and that's actually, it's exactly the type of reform that I was talking about, and the historical record confirms that uh, that uh that type of policy can be a, a first task, can move society [UNSURE OF WORD] first pass. In 1991, when, you know, hit by the greatest economic crisis since World War II, Sweden identified labor taxes as the largest drain on economic growth and financed their reduction by the introduction of carbon taxes. So that was a bit, I think, I don't remember it any more what happened in the nineties, but I think in the case of Sweden, it was the opposite. They basically said, let's reduce taxes to boost growth and the labor tax, and the most distortionary but I need to finance this somehow. Let's raise carbon taxes which is, I'm sure, in the back of the mind was we are doing that for environmental reasons as well. And Germany facing a market crisis in 2001, financed the reduction of social security contribution by an increase in energy taxes, and, and that was complemented by subsequent reduction of renewable source of energy, again at the point that we are discussing here, that you know, a tax move that gets potentialize, so gets uh, stronger if you complement by other policies, and it was the same in British Colombia.

Saviano

Well, and you highlighted early on, the role that, that emerging technology can play. In particular, Marcello, you mentioned artificial intelligence. There, there are new AI tools that are assisting governments to, to find the optimal taxation point where taxes will start to have a negative impact on the economy. So, simply put, how high can a government set the tax rate, before it starts to have negative impacts on the economy and that is a problem that is ripe for artificial intelligence, machine learning to solve, and I think it'll be exciting as we look out in the coming years, just in the very near future, to see how these technologies can actually uh provide new tools to policy makers to set better taxes, to achieve the objectives that they want to achieve. I'd be really interested to know that and you had great examples of taxes influence behavior. We've just talked about that with climate change, but also if you think that, that members of society are drinking too many sugary beverages, tax it and the data says that consumption will go down, and same with tobacco use and, as you highlight, similar impact on labor and investment. Can you give any other example of another important societal issue that may be ripe for a tax policy intervention in a new and creative way to, to affect behavior as we've been talking about?

Estevão

Yeah, I mean, you can think about other ways. I mean the logic is similar to the logic of taxing carbon or consumption of goods that are bad for your health. So, I can think, for instance, for... of congestion charges. So, um, you know, some main car traffic. Well traffic congestion. So, if you had some kind of, some kind of uh, uh way to price uh the social cost of having too many cars out, and then you let the market decide how to be... how best to respond. I mean some may car pool, or take public transportation, take a bike, or find another job so they don't have to commute to, to downtown or something like that. So, that's another example of think about how to tax and I know that points of the city of Sao Paolo for a while, try to organize this by giving the by, by saying they... cars with uh license plate ending in particular numbers could go out in the streets this day, but not... No, the, the other day or so. So, it's like Wednesdays uh cars with this numbers and all... or Monday, Wednesday and Fridays, and then Tuesday and Thursdays, they had cars with, with a different set of numbers at the end of their license plate.

Saviano

That's very creative.

Estevão

And they did actually fine... they would impose a fine, which is basically a tax, if you did not a, abide by that. So, a policeman could stop you in the street and basically fine you. So that's another example of a tax.

Saviano

There's a rich need for that. I've loved my I've um, I've been to São Paulo a number of times and I'm always struck by the number of heliports on the top of buildings and seeing helicopters jumping from building to building and to the airport because the traffic is legendary, and we've seen cities experimenting with whether it's your license plate or the time of day and providing a toll charge which, as you said, is an essence, a tax. I think that's a great example. Those taxes will influence behavior and they'll reduce they will reduce that congestion. Let's shift to the question of trust and in order for any of the tax policies that we've talked about today, Marcello, to be overly effective, there needs to be trust by citizens that the Government will spend the resources wisely and I'm curious in your work, if you feel that you've seen some best practices, how nations can build that trust with their citizens, that it's such an important component. Would you agree?

Estevão

Oh yeah. I mean, trust involvement in ongoing institutions has real economic implications. So, if you think of taxation, trust is at the core of voluntary compliance and what's voluntary compliance? The taxpayers voluntarily seek to comply with the law rather than engage in fraud. Voluntary compliance means that the tax administration evokes few resources to compliance checks and audits, so the discussion will have artificial intelligence which is key. A lot of the work there, the collaboration that you have with the private sector Governments, in that aspect is how to use artificial intelligence to get that fraud finances. But if you have a system that has a lot of trust in there and uh, then it's a system that can save and the savings in turn be channeled into healthcare, education, whatever the priority may be. So, I do find, this is very crucial, this notion of trust; that what you are contributing comes back to you in terms of good services. Maybe not for you but for your neighbor that is less fortunate. That's really about development, by the way. That's You do see uh, societies that are richer today. Societies that uh, the population has a better let's put it this way, a better relationship with Government and with tax paying. I don't think we have done a lot of work around trust building. Actually, a publication is forthcoming, the fold that precisely addressed discretion, you know, this publication's called Innovations in Tax Compliance, building trust, navigated politics and dealing with fraud. And that takes a fresh look at the question of tax reform. It presents a framework. So, we are enhancing tax reform to boost revenues and strengthening and strengthen the physical contract between the population and the Government.

Saviano

But is a fiscal contract. You're right, it's a great way to put it. I actually learned from our work with the World Bank, this notion of tax morale and that may not be understood by our audience. By tax morale, we mean, you know, what is driving people and businesses to pay tax? And what incentive do they have to pay tax? And I think the foundation of that principle of tax morale, Marcello, is this notion of trust. That if citizens trust that their Governments will expend those resources wisely and in a fair and efficient way, then they'll have greater incentive to pay their taxes. And I think that they also have an expectation that Government will spends a reasonable amount of attention and resources on fighting fraud and corruption. That is a key component of trust. In your experience, would you say that that's certainly a key element of focus from Governments to gain this trust, is to focus on ensuring that they're spending wisely but also that they're putting enough energy and resources into fraud and corruption, detection?

Estevão

Yeah, no,this is a, actually a quite complicated but it may seem simple at the surface but it's not. In practice, working Governments do [abuse] trust. It's an It's a big question. I'm going to get back to the notion of providing good service. But if you even before that. I mean, what I've seen that Governments efforts to build this trust, have often been limited to small scale interventions, like, sending letters to taxpayers that emphasize the connection between revenue and services of various kinds of public education, outreach campaigns, you know, pursuing a similar purpose. I mean, deep efforts to build trust seem needed. Uh, and I think a starting point for such trust building lies in improving the basic fairness of tax systems. This typical includes the perceived fairness in the taxation of the rich and the poor and what we economists call, the vertical equity. And it's a topic that's very much in the public domain. I mean, the whole uh, we are the 99 or you know, the 1% versus 99% of the population, they were sitting ins several years ago in the US, New York, in front of, you know, the United Nations and all that and uh, but also in the treatment of the same tax of payers in let's say, different industries or in different situations. But it's more or less the same taxpayers and that's what we economists call, horizontal equity. So vertical equity and horizontal equity are quite important, I think for this trust building, so people feel that everybody's paying their fair share and that brings, that ties together with things I said at the beginning. Uh, how much are this multi-national enterprise paying in terms of taxes in my country? Or why some rich people with a lot of property pays no taxes? You will see that conversation in the US. It's not, by no means just a developing country issue. The whole notion that, you know, we have these billionaires, they are paying a much smaller share of their income taxes than their secretaries and uh, you know, this is uh, And then there is this quite important for this notion of trust to be built. Other aspects have to do with the tax administration, treating taxpayers with courtesy. That's as simple as that, refrain refraining from gauging corruption, like you said. It's being responsive to taxpayer inquiries. So, there's an aspect but the corruptions are bigger, systemic thing for some countries. But there is also an aspect that initially, that sending letters but there is like, the day to day courtesy and also being responsive to increase. That also matters. Now, back to your providing good services, is also crucial. And here, it's you begin touching issues that it's kind of quite sensitive for market economists and people that have done public policies like me, because one could go and say, why you don't basically earmark a particular tax that's you're levying on people? Say, you know, this tax is for this particular purpose and then people see, say that hospital being built and say, great, now I'm going to pay taxes because they see the result. That may actually have a role, you know, to be more specific.

Saviano

It’s actually visible to them.

Estevão

Yeah, the problem with earmarking that kind of creates cements, uh, the public budget and creates all in the inefficiencies. So, there is a bit of a fine line there on how to show that you're providing good services and at the same time, not earmark. We could have a whole conversation just on the earmarking. Um, but I can see some benefit maybe at the beginning for particular societies.

Saviano

Yeah, it's over the past few months, we have just uh, completed some research on tax earmarking and how prevalent it is and actually, we look around the world and Latin America has been, uh, has been at the very center and I think a leader in actually earmarking taxes for specific uses. And there's been some interesting research lately on does that impact back to the phrase we use, tax morale if citizens can see a direct linkage of their tax dollars to a particular program perhaps that they're most interested in? Marcello, I think that's such an excellent point that you just made. I think it's a great run to anchor on as we come to a close today and uh, a final question from me in this segment. Uh, let me ask you about the future and is there something that you're really excited about?

Estevão

Yeah, I mean, I'm quite excited about what I see young people nowadays. I mean, I'm not one of those old guys that think the new generation is lost I'm more and more in awe for with the use to go to the streets to protest against whatever they think is unfair. That was always the case but, you know, I have four kids Three are not kids anymore. I just have one in high school; the others are either in college or adults. But uh, um, I just see their commitment to change things and to make the world as a better place to live, certainly in this climate discussion. Or in the notion of fairness in society which we just discussed as apply to the tax system. So uh,I'm quite optimistic, I would say, of the future.

Saviano

It is very inspiring.

Estevão

And in terms of economy policy as well. I mean, there's this awareness that I see. Maybe it's because who I'm surrounded with, um, by uh, it's my colleagues that are really committed to end poverty, uh, moniker but at the same time, keeping an eye on what it takes to do that and what are the secondary effects of doing that wrongly. Be it for climate or for social justice. So, anyway, I live in a very positive environment in that sense, uh, where people are really taking action to make the world a much better place.

Saviano

You see that all around you in the great work, at the bank and um, we had a quick conversation, Marcello, we could double click on any number of the topics we talked about and really appreciates your time today. As a special ending segment that we have on the Better Innovation show, uh, we have some rapid questions. Quick questions and quick answers as a way to close out. What do you say, you up for that?

Estevão

Oh yeah. Please, go ahead.

Saviano

Alright, let's do it. First question. What book do you have on your nightstand? What books have you gifted uh, most of and recommended to others?

Estevão

Let me answer it, slightly different question, that is one I have just finished reading which is, I've just finished reading the Color of Law by Richard Rothstein, which is really, really an unbelievable kind of investigation into how US Governments in the 20th century, deliberately impose racial segregation on metropolitan areas nationwide. And it's interesting because it's a history book, uh, that is kind of focused on social justice, if you want to call, on a topic that again, of course is an economist's suspected things but I didn't know the extent of public policy and that part of it was put in the 20th century to segregate neighborhoods. So, I found that fascinating.

Saviano

Mm, that is really interesting. Thank you for that and I think that uh, I'll have to have to check that out, that there's certainly lessons from the US and to be helpful uh, around the world. Appreciate that. Okay, second question, Marcello. Tell us about a historical figure who you admire.

Estevão

Well, I think to be touched and uh, and admire people that kind of stand for what they believe. So, you know, it tends to be like, people that we all on some level admire like, Mahatma Gandhi and uh, you know, Martin Luther King and uh, you know, basically people that kind of are able to think beyond their own lives. And actually, they're putting their lives at risk by doing so. So, it's something that um, yeah, you know, it's quite remarkable from you, be incredibly hard to do, in particular, because I feel so attached to my kids, so I don't feel I own my life. But those people have this ability to kind of take a step out of their own lives and put themselves at risk and change the world.

Saviano

Mm, very inspiring and I think that's um, there's a lesson there for all of us, isn't there? And that mus that must impact your work and your focus on development. Excellent. Okay, Marcello, last question. What do you see as our greatest opportunity to build back stronger when we emerge from this pandemic?

Estevão

Good uh, institutions. Work on those and think about what you do as you manage your economy or as you manage your firm, as you manage your household. What can you do to deal with the issues of inequality, poverty and climate risks? So that's for my mantel. It's time I mean, someone said it was Obama maybe - said that you know, a crisis is something that you shouldn't be wasting. So um, uh, and I think that's the time to rethink the way we did business. We already see, by the way, changes. Uh, we are working from home andvery productive. So, let's rethink about what is this workplace environment? Um, that will help even people that for some reason cannot commute or have uh, you know, they all just depend on them to be part of the labor force. So, you may have a spike in labor force participation as the way we do business change and that was basically informed by our ability to be productive during this crisis.

Saviano

It is critical as we emerge that some things will change. They already are changing and I totally agree that the way that we're working and we're starting to see organizations returning to work and we're seeing new policies that look very different from pre-pandemic and we think that's exciting. Marcello, thank you so much. I've been looking forward to this conversation. Uh, we've been thinking about having you on the show uh, for some time and just want to thank you for your time today. You're doing amazing work at the World Bank. I just want to thank you for your contribution to the world really enjoyed this discussion today. Thank you so much.

Estevão

No, thank you, Jeff. It has been great.

Presenters

Jeffrey Saviano

EY Global Emerging Technology Strategy & Governance Leader

Podcast

Episode 10

Duration

1h 8m 41s

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.