Export Competitiveness: The Incentive Framework

1. Export Competitiveness: The Incentive Framework Paul Brenton International Trade Department World Bank April 2008

2. 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

3. Incentives - introduction Incentive framework: key issues 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)?

4. Incentives - introduction The Real Exchange Rate • 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 –> appreciation • Non-traded -> 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

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

6. Tariffs and resource allocation Tariffs and protection • 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

7. 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

8. Tariffs and resource allocation Example:Tanzania still has a relatively large number of tariff peaks

9. Tariffs and resource allocation Example: Effective rates of protection vary significantly across sectors in Morocco

10. Tariffs and revenues Need to look at revenues from trade: exemptions, VAT and excises matter - an example from Mauritius

11. 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

12. 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

13. Tariffs, employment and adjustment Example: Mauritius - Tariffs and employment 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 98 1093 3123

14. Tariffs, employment and adjustment In some sectors, the annual cost of protection exceeds the (one-off) costs of retraining labour 1,704 960 Graph shows the ten sectors With the highest deadweight losses from protection employment 89 375 221 Estimated cost of re- training a worker 283 2,352 529 10,260 45,493

15. Tariffs, employment and adjustment Example: In Mauritius, moving to a “duty free island” would displace a small number of workers, but a few sectors would suffer 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

16. Tariffs, employment and adjustment Displaced workers may end up in sectors with higher wages 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.

17. Tariffs, employment and adjustment Sources of Data • 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!)

18. 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

19. Overseas markets matter Opportunities to aggressively pursue improved access to overseas markets……

20. Overseas markets matter 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 • 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%

21. Overseas markets matter Enormous potential for developing countries to reach new geographic markets with existing products…

22. Overseas markets matter Albania reaches relatively few export markets for the products it exports…..

23. Overseas markets matter …while Romania reaches more markets for the products exported by Albania

24. Overseas markets matter Sources of Data • 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

25. 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)

26. Incentives: taxes Marginal Effective Tax Rates on Capital Corporate tax policy makes capital cheaper than labor and renders incentives powerless Source: World Bank staff and Sosa (2006)

27. 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

28. Incentives: taxes Sources of Data • Marginal Effective Tax Rate • FIAS (Rich Stern) • Investment Incentives • Government authorities • FIAS reports • FDI stocks and flows • ITC Investment Map

29. 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

30. Tools: TRIST 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

31. Tools: TRIST What TRIST offers • Results based on ACTUAL import and revenue data -> 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 -> include VAT and excise tax losses to calculate total fiscal impact -> report results at tariff line level for each trading partner -> 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 -> Any trade policy scenario can be incorporated and results are available immediately -> 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 -> TRIST is set up in excel, all formulas and steps taken are visible for user -> flexibility to incorporate local knowledge (eg. elasticities) -> Simple and intuitive modeling and assumptions -> Allows for ongoing stake holder dialogue to improve according to clients’ needs

32. Tools: TRIST