Export Competitiveness: The Incentive Framework

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Export Competitiveness The Incentive Framework

• Paul Brenton
• International Trade Department
• World Bank
• April 2008

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Outline

• Why the incentive framework matters
• Tariffs and resource allocation
• Tariffs and revenues
• Tariffs, employment and adjustment
• Looking at overseas markets
• Tax and labour policies
• Tools and Data

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Incentive framework key issues
Incentives - introduction

• Do tariff, tax and labor laws
• Encourage investment to serve the
  domestic market over exports?
• Favour large firms over small firms?
• Support old firms/sectors over new activities?
• Encourage investment in capital over investment
  in people?
• Discourage foreign investment relative to
  domestic investment (or vice versa)?

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The Real Exchange Rate
Incentives - introduction

• Concerns with unstable and over-valued ER
• But how to identify over-valuation - different
  methodologies
• RER depends on many factors
• Capital inflows for investment, remittances, aid
  flows etc
• Productivity growth in response to reforms
• Tradables gt appreciation
• Non-traded -gt depreciation
• Policies that are good for the economy will tend
  to reinforce real depreciation
• Improve productivity in key non-traded sectors
  (transport, telecoms, energy)
• Further trade liberalization
• Gradually shift in reliance for macro management
  to fiscal policy

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The pros and cons of keeping substantial trade
protection
Incentives - introduction

• The case for trade protection
• In many low income countries tariffs are a major
  source of revenue
• Protected sectors provide an important source of
  income for the poor
• Particular industries need time to adjust to
  globalisation
• Resources in these sensitive sectors face
  particularly high costs of adjustment with
  potentially important impacts on poverty
• Costs of maintaining protection
• Anti-export bias, raises cost of intermediates
• resources stuck in low productivity activities
  could be earning higher returns in expanding
  export and efficient import competing sectors
• Limits investments by firms and workers to become
  more productive
• Impact on customs resources and reform delays
  dealing with NTBs
• Impact on poverty protected products may form a
  high share of the consumption bundle of the poor
• Risk of trade diversion most countries are
  party to regional and/or bilateral preferential
  trade agreements

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Tariffs and protection
Tariffs and resource allocation

• Issues
• Does the structure and level of tariffs entail a
  bias against exports?
• Is the tariff schedule complex and difficult for
  customs to apply?
• Indicators
• Average tariff relative to countries with strong
  growth
• Weighted/unweighted, MFN, Statutory, applied
• Dispersion and complexity of tariffs
• Escalation, Effective protection, Non-ad valorem
  duties
• OTRI

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Tariffs and resource allocation
Example Kenya has reduced its tariffs but its
average tariff is still above the fast-growing
economies
Simple average tariff
Kenya
Fast growing economies
Source Bank staff calculations, based on UNCTAD
TRAINS12 of 16 Fast growing economies does not
include India, Botswana, Burkina Faso and
Cambodia due to data limitations
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ExampleTanzania still has a relatively large
number of tariff peaks
Tariffs and resource allocation
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Example Effective rates of protection vary
significantly across sectors in Morocco
Tariffs and resource allocation
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Need to look at revenues from trade exemptions,
VAT and excises matter - an example from Mauritius
Tariffs and revenues
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Sources of Tariff and Customs Data

• Tariff schedules
• Government
• WITS
• Summary information and indicators
• WTI
• ITC MacMap
• World Tariff Profiles
• WTO Trade Policy Reviews
• IMF reports (aggregate customs collections)
• Customs/Revenue Authority

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Tariffs, employment and adjustment
Tariffs, employment and adjustment

• How much employment are tariffs protecting?
• The cost per job protected
• The adjustment implications of tariff reform
• Will adjustment be concentrated in particular
  sectors, particular groups of workers?
• Measures to ease adjustment
• Support for enterprise restructuring and skill
  upgrading within sectors
• Training and social safety for workers moving to
  new sectors and occupations

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Example Mauritius - Tariffs and employment
Tariffs, employment and adjustment
199
Of 57 manufacturing sectors, only 17 sectors
have protection of an average tariff of greater
than 10 per cent. The average tariff for 24
sectors is less than 1 percent. For 8 sectors the
average tariff lies between 1 and 5 per cent.
0?
Employment
9509
3361
Tariff rate
1040
47443
0?
0?
2543
217
0?
8024
0?
2133
286
1093
98
3123
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In some sectors, the annual cost of protection
exceeds the (one-off) costs of retraining labour
Tariffs, employment and adjustment
1,704
960
Graph shows the ten sectors With the highest
deadweight losses from protection
employment
89
375
Estimated cost of re- training a worker
221
283
2,352
529
10,260
45,493
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Example In Mauritius, moving to a duty free
island would displace a small number of workers,
but a few sectors would suffer
Tariffs, employment and adjustment
Estimated change in industrial employment from
removing all duties
-20.6
-17.5
-34.7
-3.4
Male
Share of sector employment
-63.9
Female
Share of industrial employment 2005
-10.1
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Displaced workers may end up in sectors with
higher wages
Tariffs, employment and adjustment
Shows ratio of average wage for women in sector
relative to that for women in EPZ manufacturing
female
male
Based on regression results on Household Budget
Survey 2006/7 data, controlling for age and
education of worker.
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Sources of Data
Tariffs, employment and adjustment

• Employment/Output
• National industrial census
• Continuous surveys
• UNIDO
• Wages/Incomes by sector
• National labour statistics
• Household budget surveys
• Unemployment
• By duration, type of worker, previous sector of
  employment etc (good luck!)

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Overseas markets matter!

• Market access conditions
• Applied tariffs in overseas markets
• Export OTRI
• Preferences and rules of origin
• Measuring success in reaching overseas markets
• Index of export market penetration

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Opportunities to aggressively pursue improved
access to overseas markets
Overseas markets matter
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One way to expand exports is to reach new
geographic markets with existing products and
often it has barely scratched the surface of its
potential
Overseas markets matter

• Export Market Penetration Ratio
• Compares actual number of bilateral flows with
  potential number
• Potential markets are those that import the
  products exported by the country concerned
• Example
• Madagascar exported 705 products in 2004
• There were 66873 potential markets for these
  products
• The actual number of trade flows was 2450
• Hence the export market penetration ratio was
  3.7
• For Taiwan the ratio was 32.8, for S. Africa
  16.7

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Enormous potential for developing countries to
reach new geographic markets with existing
products
Overseas markets matter
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Overseas markets matter
Albania reaches relatively few export markets for
the products it exports..
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while Romania reaches more markets for the
products exported by Albania
Overseas markets matter
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Sources of Data
Overseas markets matter

• Foreign Market Access (foreign tariffs)
• WITS (UNCTAD and WTO data)
• Global Monitoring Report (Market Access OTRI)
• ITC MacMap
• WTI
• Foreign Market Penetration
• Compute using UN Comtrade data WITS

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Tax and labour policies

• Investment incentives may
• favor large firms over small
• favor investment in capital over labor
• may cost a lot for marginal additional investment
  
• Restrictions on foreign investment minimum
  capital requirements, high fees for work permits,
  discretionary approval process can
• discourage investment in small enterprise
• discourage investment in services
• and limits transfers of technology and know-how
  as well as access to foreign markets and
  production chains
• Labour market flexibility is important to allow
  resources to move to more efficient firms and
  sectors
• adjustment costs lower where labour markets more
  flexible (Bacchetta and Janson)

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Marginal Effective Tax Rates on Capital
Incentives taxes
Corporate tax policy makes capital cheaper
than labor and renders incentives powerless
Source World Bank staff and Sosa (2006)
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Incentives taxes
Incentives are dominated by tax holidays, but
discretion entails substantial distortions. and
a bias against SMEs
METR without tax holidays
METR with tax holidays
Source Sosa (2006)
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Incentives taxes
Tax policy makes capital cheaper than labor
and renders incentives powerless with no
apparent rationale
METR without incentives
METR with incentives
Source World Bank
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Sources of Data
Incentives taxes

• Marginal Effective Tax Rate
• FIAS (Rich Stern)
• Investment Incentives
• Government authorities
• FIAS reports
• FDI stocks and flows
• ITC Investment Map

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Tools

• TRIST
• Use trade and revenue (and production?) data
  collected by government to evaluate tax and
  tariff reforms
• MARTASIM
• More sophisticated with computation of effective
  rates of protection
• WITS
• Retrieve and analyze data on trade flows
• Retrieve and analyze tariff schedules

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TRIST
Tools TRIST
CUSTOMS Data on imports and tariff, excise and
VAT revenue by product and trading partner

• RESULTS
• Imports by product and trading partner
• Tariff, excise and VAT revenue by product and
  trading partner
• Applied tariff rate and price changes by sector
• Domestic output and employment by sector

TRIST A single Excel file containing all data,
tariff reform definitions and a simple
partial equilibrium model of importing
NATIONAL STATISTICS Data on domestic output and
employment by sector
USER Definition of tariff reform scenarios
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What TRIST offers
Tools TRIST

• Results based on ACTUAL import and revenue data
• -gt Use applied tariff rates so we can take into
  account tariff exemptions at product and
• partner level and easily account for non-ad
  valorem tariffs
• Answers a range of policy relevant questions
• -gt include VAT and excise tax losses to calculate
  total fiscal impact
• -gt report results at tariff line level for each
  trading partner
• -gt reports changes in imports and protection (and
  domestic output and employment subject to data
  availability) at sector level (eg. to identify
  sensitive sectors)
• Is flexible enough to respond to changes in trade
  policy scenarios and required analysis
• -gt Any trade policy scenario can be incorporated
  and results are available immediately
• -gt extensions can be added to respond to ad-hoc
  questions Eg. Protection at GTAP level (Nigeria)
• Is transparent and allows for the incorporation
  of local knowledge
• -gt TRIST is set up in excel, all formulas and
  steps taken are visible for user
• -gt flexibility to incorporate local knowledge
  (eg. elasticities)
• -gt Simple and intuitive modeling and assumptions
• -gt Allows for ongoing stake holder dialogue to
  improve according to clients needs

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Tools TRIST