0S = Public Disclosure Authorized The Impact of Changes in Job Security Regulations in India and Zimbabwe Peter R. Fallon and Robert E. B. Lucas Diversification of Macroeconomic Risk and International Integration of Capital Markets: The Case of Mexico Luis F. de la Calle Debt Relief and Economic Growth in Mexico Public Disclosure Authorized Sweder van Wijnbergen A SYMPOSIUM ON TAX POLICY IN DEVELOPING COUNTRIES Introduction: Tax Policy Issues for the 1990s Javad Khalilzadeh-Shirazi and Anwar Shah Do Taxes Matter for Foreign Direct Investment? Anwar Shah and Joel Slemrod Prospects for Agricultural Land Taxation in Developing Countries Jonathan Skinner Taxation of Financial Assets in Developing Countries Christophe Chamley Public Disclosure Authorized Tax Incidence Analysis of Developing Countries: An Alternative View Anwar Shah and John Whalley Applying Tax Policy Models in Country Economic Work: Bangladesh, China, and India Henrik Dahl and Pradeep Mitra A RETROSPECTIVE ON THE FIFTH ANNIVERSARY OF THE WORLD BANK ECONOMIC REVIEW Note from the Editor Cumulative Indexes of Articles and Authors List of Referees Public Disclosure Authorized THE WORLD BANK ECONOMIC REVIEW EDITOR Ravi Kanbur MANAGING EDITOR Sandra Gain EDITORIAL BOARD Carlos Rodriguez, Centro de Estudios John Holsen Macroeconomicos, Buenos Aires Gregory K. Ingram T. N. Srinivasan, Yale University Ravi Kanbur Joseph Stiglitz, Stanford University Sarath Rajapatriana Kaushik Basu, University of Delhi Marcelo Selowsky Guillermo Calvo, International Monetary Fund Dennis N. de Tray Alberto Giovannini, Columbia University Jacques van der Gaag Sweder van Wijnbergen The World Bank Economic Review is a professional journal for the dissemination of World Bank-sponsored research that informs policy analyses and choices. It is issued three times a year, with an occasional additional issue devoted to a special area of current research or policy interest. The Review is directed to an international readership among economists and social scientists in government, business, and international agencies, as well as in universities and development research institutions. The Review emphasizes policy relevance and operational aspects of eco- nomics, rather than primarily theoretical and methodological issues. It is intended for readers familiar with economic theory and analysis but not necessarily proficient in advanced mathemati- cal or econometric techniques. Articles will illustrate how professional research can shed light on policy choices. Inconsistency with Bank policy will not be grounds for rejection of an article. Articles will be drawn primarily from work conducted by World Bank staff and consultants. Before being accepted for publication by the Editorial Board, all articles are reviewed by two referees who are not members of the Bank's staff; articles must also be recommended by at least one external member of the Editorial Board. The Review may on occasion publish articles on specified topics by non-Bank contributors. Any reader interested in preparing such an article is invited to submit a proposal of not more than two pages in length to the Editor. The views and interpretations in articles published are those of the authors and do not neces- sarily represent the views and policies of the World Bank or of its executive directors or the countries they represent. When maps are used, the designations employed are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, or area, or concerning the delimitations of its boundaries or national affiliation. Comments or brief notes responding to Review articles are welcome and will be considered for publication to the extent that space permits. Please direct all editorial correspondence to the Editor, The World Bank Economic Review, The World Bank, Washington, D.C. 20433, U.S.A. Subscriptions to the World Bank Economic Review are available without charge to readers with mailing addresses in developing countries and in socialist economies in transition. Written request is required every three years to renew such subscriptions. See the coupon at the back of this issue for subscription charges and additional information. ) 1991 The International Bank for Reconstruction and Development / THE WORLD BANK All rights reserved Manufactured in the United States of America ISSN 0258-6770 Material in this journal is copyrighted. Requests for permission to reproduce or translate articles should be addressed to the Director, Publications Department, The World Bank, Washington, D.C. 20433, U.S.A. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the intended reproduction is for noncommercial purposes, with- out asking a fee. Permission is not required to make photocopies for classroom and similar immediate use. This journal is indexed regularly in Current Contents/Social & Behavioral Sciences, Index to International Statistics, Journal of Economic Literature, Public Affairs Information Service, and Social Sciences Citation Index®. THE WORLD BANK ECONOMIC REVIEW Volume 5 September 1991 Number 3 The Impact of Changes in Job Security Regulations 395 in India and Zimbabwe Peter R. Fallon and Robert E. B. Lucas Diversification of Macroeconomic Risk 415 and International Integration of Capital Markets: The Case of Mexico Luis F. de la Calle Debt Relief and Economic Growth in Mexico 437 Sweder van Wijnbergen A SYMPOSIUM ON TAX POLICY IN DEVELOPING COUNTRIES Introduction: Tax Policy Issues for the 1990s 459 Javad Khalilzadeh-Shirazi and Anwar Shah Do Taxes Matter for Foreign Direct Investment? 473 Anwar Shah and Joel Slemrod Prospects for Agricultural Land Taxation 493 in Developing Countries Jonathan Skinner Taxation of Financial Assets in Developing Countries 513 Christophe Chamley Tax Incidence Analysis of Developing Countries: 535 An Alternative View Anwar Shah and John Whalley Applying Tax Policy Models in Country Economic 553 Work: Bangladesh, China, and India Henrik Dahl and Pradeep Mitra A RETROSPECTIVE ON THE FIFTH ANNIVERSARY OF THE WORLD BANK ECONOMIC REVIEW Note from the Editor 575 Cumulative Index of Articles 577 Cumulative Index of Authors 585 List of Referees 593 THE WORLD BANK ECONOMIC REVIEW, VOL. 5, NO. 3: 395-413 The Impact of Changes in Job Security Regulations in India and Zimbabwe Peter R. Fallon and Robert E. B. Lucas Employment laws in India and Zimbabwe require employers to obtain permission from the government to retrench or lay off workers. The effect of these laws on the demand for employees in 64 manufacturing industries is examined using time series data. Little evidence is found indicating slower adjustments in employment levels and hence retar- dation in any structural adjustment following the new laws. However, in both countries a substantial decline in the demand for employees (other things equal) followed the new legislation. In Zimbabwe it is difficult to be precise about a causal connection between the drop in the demand for labor (allowing for concurrent increased wages) and the new legislation because enactment occurred simultaneously with Independence; however, the current economic climate induced high levels of investment in capital but not investments in long-term commitments to employees. But in India further evidence supports a causal connection: larger establishments covered by the job security regula- tions tended to experience a decline in the demand for labor while smaller, uncovered enterprises in the same industries did not; moreover the decline in demand for em- ployees across industries in India was larger where the private sector predominates, where larger establishments covered by the new laws are important, and where a smaller proportion of employees are union members. Thus in both countries the policy implemented to protect jobs may have resulted in farfewer jobs. Upon achieving independence in 1980, the government of Zimbabwe passed a new Employment Act, requiring employers to obtain permission from the Min- istry of Labor to fire or lay off workers. Comparable regulations were imposed in India by the Industrial Disputes (Amendment) Act of 1976, requiring that written permission be obtained, normally from the relevant state government, either to close a plant or to retrench workers. The immediate goal of these items of legislation was to protect the livelihood of workers and to maintain jobs. Any addition to economic security in the lives of workers is clearly a laudable goal in its own right. But the question addressed in this article is whether these particular job security regulations have had undesirable side effects, which may even have thwarted the original goals of the legislation. India and Zimbabwe are Peter R. Fallon is in the Africa-SahelianDepartment of the World Bank and Robert E. B. Lucas is in the Economics Department of Boston University.The authors are grateful for helpful comments received from three referees. ) 1991 The International Bank for Reconstruction and Development/THEWORLD BANK 395 396 THE WORLD BANK ECONOMIC REVIEW, VOL. 5, NO. 3 not alone in imposing permission requirements for retrenchment, although their laws are among the most stringent in the world. These two countries were selected for analysis because of this extremity, combined with the availability of high-quality industrial data. In very broad terms one might expect that making jobs more secure would make