Examining the impact of tax policies and institutional reforms on economic growth: A systematic approach on Djibouti

Abstract

Institutions are rules, guidelines, and regulations that regulate how agents participate in economic transactions, such as the purchasing and selling of commodities and services, as well as the usage of assets. They impact the objectives of major economic players in society, influencing expenditures in both tangible and intellectual capital, technology, and commodity. It also entails proper amounts of tax collections, which are critical for long prosperity, but many nations’ tax systems persist in their poorest connection in the encouragement of progress and state building. Hereby, the present study examined the role of tax policies and institutional reforms in promoting the economic growth of Djibouti during the period 2000 to 2021. The paper employed a Vector Error Correction model (VECM) and a Granger causality test to capture the long-run and short-run dynamic connection between the variables. As well as determining the direction of these associations. The findings presented that during the short-run tax policies and institutional reforms have an insignificant influence on economic growth. Whereas, the long-run outcome revealed that business taxes, government effectiveness, and institutional quality have a positive impact on economic growth. Further, the Granger causality test illustrated one-way causality between GDP, government effectiveness, and regulatory quality. The findings contribute by providing evidence to the region and for the country itself on the way of managing taxation and implementing rigorous institutional regulation in hope of promoting economic growth.