Research Paper No. 2007/26
Trade Sustainability and Aid
under Liberalization in Fragile Least
Developed Countries
Amelia U. Santos-Paulino*
May 2007
Abstract
This study investigates the effect of trade liberalization on export growth, import
growth, the trade balance and the current account of the balance of payments in 17 least
developed countries (LDCs) over the period 1970 to 2001. The paper also assesses the
marginal relation between capital flows (e.g., aid flows) and import growth, and the
trade balance and the current account of the balance of payments. The higher import
growth contrasts with the more modest export growth following trade liberalization and
this has fundamental policy implications, especially for the balance of trade and the
balance of payments. However, the financing and sustainability of the trade deficit in
the reforming countries will depend not only on the outcome of trade liberalization, but
also on other macroeconomic policies, developments in the real exchange rate and the
inflows of foreign capital.
Keywords: trade liberalization, aid, balance of payments, dynamic panel data, least
developed countries
JEL classification: C23, F13, F14, F32
Copyright © UNU-WIDER 2007
* UNU-WIDER, Helsinki; email: Amelia@wider.unu.edu
This study has been prepared within the UNU-WIDER project on Fragility and Development, directed by
Mark McGillivray and Amelia Santos-Paulino.
UNU-WIDER gratefully acknowledges the financial contributions to the project by The Australian
Agency for International Development (AusAID), the Finnish Ministry for Foreign Affairs, and the UK
Department for International Development—DFID.
UNU-WIDER also acknowledges the financial contributions to the research programme by the
governments of Denmark (Royal Ministry of Foreign Affairs), Norway (Royal Ministry of Foreign
Affairs), and Sweden (Swedish International Development Cooperation Agency—Sida.
ISSN 1810-2611
ISBN 92-9190-965-3
ISBN 13 978-92-9190-965-0
Acknowledgements
I am grateful to the Office of the Special Coordinator for the Least Developed Countries
(LDCs) at the United Nations Conference on Trade and Development (UNCTAD) in
Geneva for funding an earlier version of this research. I also appreciate valuable
comments and suggestions by Lisa Borgatti, Charles Gore, Massoud Karsenas, José R.
Sánchez-Fung, Mark McGillivray and Tony Thirlwall, and seminar participants at
Institute of Development Studies (IDS) at the University of Sussex, UK. Any remaining
errors are mine.
Acronyms
COMESA
CPIA
LDCs
MFN
ODA
PRGF
QRs
SACU
SADC
SAF
SAP
SSA
UNCTAD
VAT
Common Market for Eastern and Southern Africa
country policy and institutional assessment
least developed countries
most favoured nation
official development assistance
poverty reduction and growth facility
quantitative restrictions
South African Currency Union
Southern Africa Development Community
structural adjustment facility
structural adjustment programme
Sub-Saharan Africa
United Nations Conference on Trade and Development
value added tax
The World Institute for Development Economics Research (WIDER) was
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sustainable growth, and promotes capacity strengthening and training in the
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Typescript prepared by Liisa Roponen at UNU-WIDER
The views expressed in this publication are those of the author(s). Publication does not imply
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any of the views expressed.
1
Introduction
Advanced countries and international financial and development organizations have
poured financial assistance in the form of loans, grants, and technical support to the less
developed countries, with the aim of spurring economic growth and reducing poverty.
Effective aid is seen as the foremost tool to achieve internationally agreed development
targets (e.g., Millennium Development Goals), and to arrest economic atrophy in the
poorest regions, particularly in Africa and Asia, where the majority of least developed
countries (LDCs) are found.1
However, multilateral and bilateral financial assistance is still a contentious issue. Some
academics and policymakers argue that aid failed to reduce poverty and, furthermore,
attaching conditionality to aid did not lead to policy changes. Moreover, domestic
political factors such as macroeconomic environment, secure property rights, effective
rule of law, and delivery of critical social services are seen as primary determinants of
policy changes rather than aid on its own (Devarajan, Dollar and Holmgren 2001).2 For
instance, Collier and Dollar (2001) develop a model in which aid flows respond to
policy improvements, thus establishing a better background for poverty reduction and
effective aid allocation. Another concern is that the resources tendered are inadequate
relative to the goals, and that western donors fall short of the UN target of delivering 0.7
per cent of GDP in aid (Besley and Burgess 2003: 1). Therefore, ‘even effectively
targeted aid is unlikely to yield a solution without a considerable change in the global
political climate’.
This study examines the effect of liberalization on export growth and import growth,
and on the trade balance and current account of the balance of payments in 17 LDCs,
also classified as fragile states,3 over the period 1970 to 2001. Trade liberalization is
assumed to improve a country’s performance by promoting domestic economic
1 The LDC are defined by the United Nations’ Economic and Social Council as low-income countries
that are suffering from long-term handicaps to growth, in particular low levels of human resource
development and/or severe structural weaknesses. The following criteria are used for determining the
LDC status, as proposed by the Committee for Development Policy:
(i)
(ii)
(iii)
a low-income criterion, based on a three-year average estimate of the gross domestic product
per capita (under US$900 for inclusion, above US$1,035 for graduation)
A human resource weakness criterion, involving a composite augmented physical quality of
life index (APQLI) based on indicators of nutrition; health; education; adult literacy.
An economic vulnerability criterion, involving a composite economic vulnerability index
(EVI) based on indicators of: the instability of agricultural production; the instability of
exports of goods and services; the economic importance of non-traditional activities (share of
manufacturing and modern services in GDP); merchandise export concentration; the
handicap of economic smallness (as measured through the population in logarithm).
2 However, there authors provide examples of African economies that have successfully liberalized
under structural adjustment programmes. This issue will be discussed later.
3 The LDC countries studied in this paper are also categorized as fragile states under the World Bank’s
country policy and institutional assessment (CPIA). The CPIA ranks countries according to 16 criteria
grouped in four groups: (i) economic management; (ii) structural policies; (iii) policies for social
inclusion and equity; and (iv) public sector management and institutions. The countries’ standings in
this classification will affect the pattern of financial assistance from major development funding
institutions (e.g., those under the International Development Association umbrella).
1
efficiency and by encouraging trade flows between nations.4 However, the literature on
trade liberalization has hitherto focused on the beneficial effects of liberalization
episodes by using mainly supply-side growth models, overlooking the effects on the
balance of payments.5
The paper also assesses the marginal relationship between capital flows (i.e., aid flows)
and import growth, and the trade balance and the current account of the balance of
payments. Trade liberalization by developing and least developed countries in recent
decades has been undertaken both in the context of multilateral trade negotiations, and as
part of the conditionality linked to structural adjustment and stabilization programmes
agreed with the IMF and the World Bank.6 This conditionality justifies the need of
analysing the links between the liberalization commitments and financial resources
inflows. Also, official development assistance remains the most important source of
foreign capital in poor countries, amounting to more than 20 per cent of imports, and 10
per cent of GDP.
Some studies have also analysed the causality between aid flows and trade, and vice
versa. McGillivray and Morrissey (1998) suggest that aid may induce donor exports either
because: (i) of the general economic effects on the recipient, (ii) aid is directly linked to
trade, or (iii) aid reinforces bilateral economic and political links, or (iv) a combination of
the three factors. Similarly, the view that trade can lead to aid is often attributed to the
effects of donors’ aid allocation policies. Also, trade can lead to aid depending on the
commercial links between the donor and the recipient country (which could engender
trade dependency). The authors show that there is a relationship between aid and trade but
that the specific nature of this relationship can vary between donor-recipient pairs. Lloyd
et al. (2000) produce similar conclusions.7
Moreover, not only aid flows but the volatility of such flows has serious implications for
the recipient country’s domestic activity, particularly in highly aid-dependent countries
such as LDC (Bulίř and Hamnn 2003). Also, programme aid inflows are regarded as
paramount for the financing and sustainability of reforms, and for funding balance of
payments deficits. White and Dijkstra (2003) show that capital inflows (i.e., programme
aid)8 would ultimately contribute to boost economic growth and hence reduce poverty.
The authors also stress the marginal direct impact on the external accounts.
4 See Romer (1994); Grossman and Helpman (1995) and Krueger (1998).
5 Santos-Paulino and Thirlwall (2004) analyse the effect of trade liberalization on exports, imports and
the balance of payments for a sample of developing and LDCs that have also liberalized in the context
of structural adjustment and/or multilateral trade commitments. However, the authors do not assess
the impact of foreign capital or aid, or how financial inflows might be influenced by the liberalization
process.
6 The LDCs began to receive core financing in the mid-1980s by the IMF’s structural adjustment
facility (SAF) in March 1986, which was extended in 1987 to the enhanced structural adjustment
facility (ESAF) (see IMF 1998). In 1999 the ESAF was transformed into the poverty reduction and
growth facility (PRGF) which since then conduct policy change, debt relief, and financing in low
income countries.
7 See also Morrissey (2006).
8 Programme aid is defined as ‘Programme assistance consists of all contributions made available to a
recipient country for general and development purposes i.e., balance of payments support, general
2
The rest of the paper is organized as follows. Section 2 discusses trade policy reforms in
LDCs. Section 3 looks at the relationship between trade liberalization and export
performance, and the effects of trade liberalization and aid on import growth. Section 4
analyses the impact of trade liberalization and aid on the trade balance and the current
account of the balance of payments. Section 5 discusses policy implications and concludes.
2
Trade policy reforms in LDCS
From the early 1980s many least developed countries (LDCs) adopted multi-year
structural adjustment programmes (SAP) to address existing macroeconomic struggles,
and trade reforms were a key in such programmes. Improvements were achieved in the
areas of inflation, and notably on balance of payments and fiscal balances, but at the
expense of taxing international indebtedness, mostly in Sub-Saharan Africa (SSA).9
Belshaw and Livingstone (2002) show that by the end of the 1990s, half a dozen
countries had large government budget deficits and at least thirteen countries showed
negative current trade balances in excess of 40 per cent of current exports. The greater
part of such countries are LDCs.
In the context of the global phenomenon of trade liberalization, LDCs have evidenced
significant commitment towards policy reforms, in spite of problems of implementation
and disruptions (see Morrissey 2002 and UNCTAD 2002). Tables 1A and 1B present
the dating of trade liberalization in LDCs, and the average duty change before and after
the liberalization episodes. The quantifiable reduction in average tariffs in most LDCs is
also reported in Table 2. Table A2 also shows the changes in trade policy restrictiveness
(i.e., the changes in tariff and non-tariff barriers), which are noteworthy if compared
with other developing countries.
The reforms in LDCs involved, as in other developing economies, major changes in
industrial policies and the protection structures, and some of these reforms were
implemented as early as 1980s. The most common factors of trade liberalization in the
majority of the countries embrace (see Musonda and Adam 1999; Rodrik 1997 and
Morrissey 2002):10
i)
reduction of tariffs and rationalization of tariff structures, including the introduction
of new structures based on MFN (most favoured nation) rates, and zero or special
rates based on bilateral and regional trade agreements; and
ii) gradual elimination of quantitative restrictions and prohibitions.
budget support and commodity assistance, not linked to specific project activities’ White and Dijkstra
(2003: 17) (quoted by the authors from OECD 1991: 5).
9 Debt accumulation is related to the poor use of aid inflows, including well-known factors such as
political clientelism, imposition of penalties by donor agencies, lobby or pressure groups, etc. An
exhaustive analysis of aid fungibility, aid flows, or aid’s impact in economic performance is beyond
the purposes of this paper. For a detailed analysis of aid effectiveness to Africa, refer, for example to
Kanbur (2000) and Addison, Mavrotas and McGillivray (2005).
10 In the present case the date of liberalization coincides with the liberalization episodes described in
Tables 1A and 1B, or the second liberalization attempt. Also, Borgatti (2003) presents an exhaustive
analysis of the LDCs’ trade policy regimes. See also Table A1.
3
Table 1A
Export growth and duty change before and after liberalization episodes
Liberalization:
Before liberalization
Country
1st attempt
Episodes
Export growth Export duty
Bangladesh
1986
1992-present
6.69
Benin
1988
1990-94
After liberalization
Export growth
Export duty
4.50
10.94
0.0
8.25
2.43
2.62
0.0
Burundi
2002
2002 present
6.70
15.46
16.90
0.03
Gambia, The
1985
1985-88
6.48
4.65
1.09
1.22
Guinea
1986
1985-87
–
–
4.62
16.03
Lesotho
1984
1994-99
8.89
5.92
8.87
0.0
Madagascar
1988
1988-96
3.02
5.00
6.14
0.17
Malawi
1988
1997-2001
4.94
0.48
2.75
0.0
Mauritania
1992
1992-97
10.51
0.48
1.67
0.0
Mozambique
1987
1992-93
-14.39
–
11.32
0.0
Nepal
1986
1986-92
10.41
3.36
9.68
1.17
Senegal
1986
1994-present
2.86
1.89
4.33
0.0
-0.65
60.69
6.05
0.67
6.28
9.07
0.0
Sudan
1992
1996-2000
Tanzania
1984
1990-present
Togo
1988
1988-96
11.17
1.96
0.05
0.0
Uganda
1981
1991-96
1.96
35.21
11.51
0.02
Zambia
1982
1992-95
0.02
2.65
3.39
0.0
–
Source: Liberalization dates from Borgatti (2003); Export growth and duty: author’s own estimations.
Table 1B
Import growth and duty change before and after liberalization episodes
Liberalization:
Country
1st attempt
Episodes
Bangladesh
1986
1992-present
Before liberalization
Import growth Import duty
9.39
33.46
After liberalization
Import growth
Import duty
8.70
15.01
Benin
1988
1990-94
6.16
51.14
3.80
0.0
Burundi
2002
2002 present
5.14
22.00
13.23
8.19
Gambia, The
1985
1985-88
2.79
69.09
2.34
65.91
Guinea
1986
1985-87
–
–
2.74
21.44
Lesotho
1984
1994-99
11.62
72.07
-1.30
0.0
Madagascar
1988
1988-96
0.84
36.37
7.29
46.54
Malawi
1988
1997-2001
2.48
23.05
2.53
13.54
Mauritania
1992
1992-97
7.74
35.33
2.73
0.0
Mozambique
1987
1992-93
-6.14
–
4.75
0.0
Nepal
1986
1986-92
9.27
35.17
7.54
31.27
Senegal
1986
1994-present
2.40
39.73
2.77
0.0
Sudan
1992
1996-2000
2.45
42.08
0.15
21.34
Tanzania
1984
1990-present
–
13.09
-0.50
0.0
Togo
1988
1988-96
8.14
28.68
0.19
0.0
Uganda
1981
1991-96
3.63
12.89
10.74
32.07
Zambia
1982
1992-95
-1.33
10.68
3.45
0.0
Source: Liberalization dates from Borgatti (2003); Import growth and duty: author’s own estimations.
4
Table 2
Average tariffs in LDCs (1997 and 2000)
Average tariff
Country
1997
2000
% change
Bangladesh
26.0
26.4
1.54
Benin
14.0
14.6
4.29
Bhutan
15.3
15.4
0.65
Burkina Faso
32.1
14.6
-54.52
Burundi
41.0
35.0
-14.63
Cambodia
18.0
16.5
-8.33
Ethiopia
24.3
18.9
-22.22
Gambia, The
13.7
11.8
-13.87
Guinea
15.0
16.9
12.67
Lesotho
15.1
6.4
-57.62
Madagascar
18.0
19.2
6.67
Malawi
25.3
13.6
-46.25
Maldives
22.0
20.0
-9.09
Mali
23.1
14.6
-36.80
Mauritania
19.0
14.0
-26.32
Mozambique
15.6
13.8
-11.54
Nepal
17.3
13.3
-23.12
Senegal
29.0
14.6
-49.66
Solomon Islands
45.0
22.7
-49.56
Tanzania
21.8
14.3
-34.40
Togo
16.3
14.6
-10.43
Uganda
13.2
14.9
12.88
Yemen, Republic of
12.9
12.6
-2.33
Zambia
18.6
13.4
-27.96
Source: Direct country communications and author’s own calculations.
Export promotion strategies have been put in place. These include duty drawback
schemes, tax rebates and exemptions, financial support to exporters, establishment of
export promotion agencies, and bilateral and regional trade agreements. Although there
has not been an uniform exchange rate policy amongst LDCs, there is a variety of
exchange rate regimes such as monetary unions (WAEMU, including Benin, Burkina
Faso, Guinea-Bissau, Mali, Niger Senegal, and Togo), basket peg (Bangladesh and
Solomon Islands), fixed peg to one currency (Bhutan, Cambodia, Comoros, Lesotho,
and Maldives), floating rates (The Gambia, Guinea, Madagascar, Malawi, Tanzania,
Uganda, Yemen and Zambia), and managed float (Ethiopia, Lao and Mauritania). Table
A1 details the specific reform policies carried out by the countries under analysis.
Foreign exchange regimes deregulation has also been important in reforming trade
regimes.
These policy changes are also evident in international rankings of trade policy regimes
such as the IMF (1998) and the Heritage Foundation Index of Economic Freedom (see
Johnson, Kirkpatrick and Homes 1998; O’Driscoll et al. 1999), which classify many of
those economies as possessing low-to-moderate trade policy regimes.
5
However, as Morrissey’s (2002) review of trade policy reforms in twelve SSA countries
indicates, the success in various efforts in this direction has been mixed. While some
countries made significant progress in liberalizing trade, rationalizing tariff structures
and removing export bias associated with exchange rates and other restrictions, others
have been slow and partial in the implementation of reforms. Moreover, where reforms
have been implemented, their effects are difficult to isolate from those of other factors,
positive or negative, affecting tradables (e.g., price and non-price incentives).
Moreover, in the case of Africa, Dean, Desai and Riedel (1994: 14-8) show that most of
the countries had very restrictive trade regimes to start with (both in terms of tariff and
non-tariff barriers). In fact, many of the countries undertook trade liberalization in the
early 1980s after suffering the adverse effects of commodity price fluctuations.
However, in some instances the reform process was reversed (e.g., Zambia) or slowed
(e.g., Malawi), which imposes th problem of credibility and sustainability. The main
reasons for such setbacks in most LDCs were political, namely the needed government
commitments, and the lack of institutional resources to accomplish the reforms.
Additionally, African countries suffer from natural barriers, which are often
understated, but which affect the effectiveness of policy reform. The impact of trade
liberalization on government revenues also hindered the reform efforts, in stances where
some countries failed to adopt alternative tax reforms as, for example, the introduction
of indirect taxes, to compensate for the loss of government revenue.
3
Trade liberalization, exports and imports
3.1 Empirical specification
The paper proceeds to investigate the impact of trade liberalization on export
performance. To that end the exercise employs an export growth equation, capturing a
mixture of demand-side and supply-side influences.11 Export growth is expected to
respond positively to world income growth and negatively to the real exchange rate
measured in such a way as to reflect international competitiveness. A modified standard
export growth, incorporating lagged adjustment (t – 1), may be written as:
xit = β 0 + β1 pxit + β 2 wyit + β3 xit −1 + µt
(1)
where it are the country- and time-specific effects for the panel data estimator, px is the
rate of change of the RER; β1 = η and β2 = ε are the short run price and income
elasticities, respectively, and μt is the error term. The long-run price and income
elasticities are given by β1/(1 – β3) and β2/(1 – β3), respectively.
Within this framework (which controls for demand side variables), there are several
channels through which trade liberalization can affect export growth. Two measures of
liberalization are included. First, the ratio of export duties to total exports (dt) is taken as
11 Export demand analysis has been applied to both industrial and developing countries. Goldstein and
Khan (1985) survey the literature related to income and price effects in foreign trade, and Senhadji
and Montenegro (1999) for an assessment of export demand equations. Greenaway and Sapsford
(1994), Shafaeddin (1994), Ahmed (2000) and Santos-Paulino (2002b) analyse export responses to
trade liberalization in developing and least developed countries.
6
a major indicator of the degree of distortion or anti-export bias in an economy. The
selection of this variable is based on the fact that export duties represent one of the most
widely used policy instruments in the countries analysed, and can be easily measured. A
reduction in the ratio is expected to raise export growth for any given change in world
income growth and the real exchange rate. Second, a liberalization indicator (libt),
defined as a dummy variable that takes the value of zero before the year of liberalization
and 1 afterwards (see Table 1A for the particular years of reform in each country). To
the extent that liberalization reduces anti-export bias, there will be shifts in both the
quantity and quality of resources into the export sector, which may also be expected to
improve export performance for any given growth of world income and the real
exchange rate.
Trade liberalization can also affect the price and income elasticities of demand directly.
Such interaction effects between liberalization and the price and income elasticities can
be estimated by including two slope dummy variables in the estimating equation,
wy×libt and px×libt. Taking account of these liberalization effects gives an augmented
export growth function of the form:
xit = α i + β1 pxit + β 2 wy it + β 3 xit −1 + β 4 d it + β 5 lib + β 6 ( px × lib )it + β 7 (wy × lib )it + µ t (2)
where αi captures country specific effects, and the expected signs of the coefficients are:
β1 < 0, β 2 > 0, β3 > 0, β 4 < 0, β5 > 0, β 6 < 0, and β 7 > 0 .
In modelling the effect of trade liberalization on import growth, the study estimates
dynamic import demand functions relating import flows to relative price and domestic
incomes.12
Another crucial issue for LDCs is the contribution of capital inflows, mainly in the form
of aid, as was stated at the outset. The augmented import growth function, which
accounts for the effects of trade liberalization and capital inflows, can be expressed as:
mit = α i + β 1 pmit + β 2 yit + β 3 mt −1 + β 4 d it + β 5 libit + β 6 aid it + ε it
(3)
Where αi are country-specific effects; pm is the growth in relative prices; y is the growth
in domestic (real) income; dit is import duties; libit is a shift dummy variable for the
years following significant liberalization; aid is the aid variable (where aid is measured
as a ratio of nominal GDP); and εit the error term. The rest of the variables are as
defined earlier, and we expect β1 < 0, β 2 > 0, 0 < β3 < 1, β 4 < 0, β5 > 0 and β 6 to be
determined. The detailed description of the variables is provided in the Appendix.
The slope dummy variables y×lib and pm×lib are also incorporated to capture the joint
effects of the elimination of import distortion measures on income and price elasticities,
respectively. The assumption is that trade liberalization has a significant impact not only
on the autonomous growth of imports, but on their sensitivity to income and price
12 Other relevant studies on import demand and trade liberalization for developing countries include
Boylan and Cuddy (1987); Mah (1999); Bertola and Faini (1991); Faini, Pritchett and Clavijo (1992),
and Santos-Paulino (2002a).
7
variations as well.13 Also, given the conditionality attached to financial assistance,
which is highly dependent on the outcomes of policy reform, a slope dummy is also
included to assess the direct impact of trade reforms on aid inflows as a share of GDP.
Thus, the equation to be estimated is:
mit = α i + β 1 pmit + β 2 yit + β 3 mt −1 + β 4 d it + β 5 libit + β 6 aid it
+ β 7 ( pm × lib) it + β 8 ( y × lib) it + β 9 (aid × lib) + ε it
(4)
3.2 Panel data analysis and results
To test for the effects of trade liberalization on export growth, the relationships are
estimated by the dynamic panel data model based on generalized methods of moments
(GMM). The GMM controls for the endogeneity of other explanatory variables, and the
instruments used are based on lagged values of the explanatory variables (Arellano
1993; Arellano and Bond 1998; Wooldridge 2001).
The results in Table 3 show that the price and income elasticities of exports are
significant, but the price elasticity is very low. Low price elasticities, which do not
comply with the ‘small country’ assumption of trade theory, are frequently found also in
time series estimates (see Senhadji and Montenegro 1999; Perraton 2003); and there is
not much difference between the short- and long-run elasticities. The impact of
liberalization is positive and significant, and the effect of the removal of export duties is
also significant in most cases. The slope variable suggests that export growth becomes
more responsive to world income growth as liberalization takes place. The slope
dummy (px×lib) coefficient, although relatively small, indicates that the liberalization
episode might improve the sensitivity of export performance to relative prices.
To look more closely at the impact of trade liberalization, a set of impulse dummies is
included, where the liberalization indicator (d1) indicates the impact of trade reform on
export growth in the first year only, instead of an average post reform effect. The other
impulse dummies (d2 and d3) pick up the impact of liberalization in subsequent years.
The results reveal a relatively smaller lagged effect of trade liberalization on export
growth in the first year following the reform, and then in the two years post reform.14
13 Melo and Vogt (1984) propose two hypotheses in this regard, which they tested for the case of
Venezuela. First, they suggest that as the degree of import liberalization increases, the income
elasticity of demand increases. Second, as economic development proceeds, the price elasticity of
import demand also rises as the ability to substitute domestic production for imports becomes easier.
14 A similar approach is undertaken by Greenaway, Morgan and Wright (2002) to analyse the
relationship between trade liberalization and GDP growth in developing countries. Using a panel data
analysis, and a set of different liberalization indicators, it is observed that liberalization does appear to
have an impact on growth, albeit with a ‘J-curve’ type response.
8
Table 3
Trade liberalization impact on exports and imports (1970-2001)
Explanatory variables
Export growth (xt)
(i)
Import growth (mt)
(ii)
(iii)
(iv)
RER growth
-0.03
(3.33)**
-0.17
(2.20)*
-0.11
(3.39)**
-0.11
(3.33)**
Income growth
1.72
(5.02)**
1.72
(2.23)*
1.68
(4.18)**
1.66
(4.21)**
Lagged export/import growth
0.07
(0.92)
0.03
(0.39)
0.13
(1.03)
0.13
(1.07)
Duties
-0.19
(2.12)*
-0.13
(1.14)
-0.17
(1.67)ζ
-0.17
(1.87)ζ
Liberalization (Shift), lib
0.50
(5.15)**
1.06
(5.75)**
Liberalization (impulse d1)
0.17
(2.12)*
2.35
(10.60)**
Liberalization (impulse d2)
0.09
(4.35)**
1.22
(4.37)**
Liberalization (impulse d3)
0.02
(0.53)
0.07
(4.24)**
Slope dummy (wy×lib),(y×lib)
0.15
(5.05)**
0.84
(2.93)*
0.22
(4.23)**
0.22
(4.25)**
Slope dummy (p×lib)
-0.02
(2.94)*
-0.07
(2.25)*
-0.08
(0.96)
-0.12
(4.21)**
Long-run income elasticity
Long-run price elasticity
1.85
1.77
1.95
1.91
-0.003
-0.18
-0.13
-0.13
Diagnostic statistics
Omit wy×lib, y×lib
20.24**
25.51**
Wald test
[0.000]
[0.000]
[0.000]
[0.000]
Sargan test
[0.332]
[0.175]
[0.193]
[0.102]
1st-order serial correlation
[0.040]
[0.080]
[0.000]
[0.000]
2nd-order serial correlation
[0.179]
[0.201]
[0.695]
[0.513]
545
545
545
545
Number of observations
Notes:
1.
93.80**
25.20**
Figures in parentheses ( ) are absolute t-ratios; figures in brackets [ ] are p-values. **, *, and ξ
indicate that a coefficient is significant at the 1%, 5%, and 10% level, respectively.
2.
Omit y × lib, pm × lib is the F-statistic for the omission of these two variables from the regression.
3.
The Wald test is for the joint significance of the regressors. The Sargan test is of over-identifying
2
restrictions, that is, for the validity of the set of instruments and is defined as Prob ( J > χ p ), where
p is the number of over-identifying instruments. The tests for 1st and 2nd order of no serial
correlation are asymptotically distributed as standard normal variables (see Arellano and Bond
1998, 2001). The p-values report the probability of rejecting the null hypothesis of serial
correlation, where the first differencing will induce (MA1) serial correlation if the time-varying
component of the error term in levels is a serially uncorrelated disturbance. 1st and 2nd order of
no serial correlation tests are related to the lags of the instruments (i.e., t−1 and t−2 ), where the
instruments are the lagged values of the explanatory variables and the lagged dependent
variable.
4.
The estimations were performed by using the DPD model developed by Arellano and Bond
(2001) Ox version 3.00 (Windows) for PcGive (C).
9
As far as the liberalization-imports tie is concerned, income elasticities are statistically
significant, whilst the price elasticities are very small and statistically insignificant.
Import tariffs have a marginal significant and negative impact on imports. The
independent impact of trade liberalization as exposed by the shift dummy coefficients is
statistically significant. Also, the positive links between liberalization and income
growth is confirmed (see Table 3).
More interestingly, the lagged impact of trade liberalization is also apparent for imports.
However, as in the case of exports, such an effect is relatively small if compare to the
shift in the dependent variable as a result of liberalization. However, in the second and
third years following the liberalization event, the direct impact of the reform increases.
Table 4
Trade liberalization and import performance: 1970-2001
Import growth (mt)
Explanatory variables
(i)
(ii)
RER growth (pm)
-0.11
(4.82)**
-0.11
(4.91)**
Income growth
1.63
(5.99)**
1.63
(6.10)**
Lagged import growth (mt-1)
0.13
(1.50)
0.13
(1.56)
Import duties
-0.12
(2.09)*
-0.16
(2.25)*
Liberalization (Shift), lib
1.87
(5.94)**
Aid growth
0.29
(4.29)**
0.31
(4.25)**
Liberalization (impulse d1)
1.09
(3.47)**
Liberalization (impulse d2)
0.04
(6.34)**
Liberalization (impulse d3)
0.01
(6.14)**
Slope dummy (y × lib)
0.21
(6.05)**
0.22
(6.17)**
Slope dummy (pm × lib)
-0.12
(6.41)**
-0.03
(2.45)*
Slope dummy (aid × lib)
0.53
(4.44)**
0.16
(4.87)**
1.87
1.87
Long run-price elasticity
-0.13
-0.13
Omit (aid × lib)
49.20**
74.81**
Wald test
[0.000]
[0.000]
Sargan test
[0.892]
[0.176]
1st-order serial correlation
[0.020]
[0.000]
2nd-order serial correlation
[0.770]
[0.757]
545
545
Long run-income elasticity
Diagnostic statistics
Number of observations
Notes:
See Table 3.
10
Table 4 incorporates the aid variables. The results corroborate previous findings. The
statistically significant coefficients of the aid variable, which accounts for the official
development assistance (ODA) and official aid received by the countries, confirm the
positive impact of aid flows on imports. Also, the direct (and positive) impact of trade
reforms on aid receipts is confirmed. However, this boost in import growth driven by
the liberalization processes and the increase in capital inflows reinforce the concerns
about the effect on the trade and current accounts of the balance of payments. These
relationships would be assessed in the following section.
4
Trade liberalization, the trade balance and the current account
4.1 Empirical analysis specification
The effect of trade liberalization on the trade balance and the balance of payments is
theoretically ambiguous. This theoretical ambiguity is also present at the empirical
level, as demonstrated and discussed by Ostry and Rose (1992); UNCTAD (1999) and
Santos-Paulino (2005).
In this study, the impact of liberalization on trade performance is measured in monetary
terms because it is the nominal gap between imports and exports that measures a
country’s shortage of foreign exchange, and how much countries need to borrow to
sustain growth if liberalization worsens the payments position (Santos-Paulino and
Thirlwall 2004). The effect of trade liberalization on the trade balance and the balance
of payments is quantified by estimating two equations which control for income and
relative price changes, and which also include a separate terms of trade variable, given
that changes in the price of exports and imports automatically affect the monetary value
of trade flows, independent of liberalization. With this procedure it is also possible to
separate the nominal and real (volume) effects of price changes on trade flows.
In order to investigate the impact of duty reductions and liberalization on the trade
balance (TB) and the current account of the balance of payments (CA), both dependent
variables are normalized by taking the trade balance and current account as a share of
GDP. The equations are derived from standard export and import demand functions in
which the growth of exports and of imports is a function of income and relative prices.
As in the case of the import growth estimations, we include the aid inflows, measured
by the official development assistance and aid receipts as a share of GDP. The basic
estimating equations are:
(5)
TB GDP it = β 1 + β 2 (TB ) + β 3 (w)it + β 4 ( y )it + β 5 ( p )it
+ β 6 (d x )it + β 7 (d m )it + β 8 (TOT )it + β 9 (lib )it + β10 ( y × lib )it + β11 (aid )it + β12 (aid × lib )it + ε it
and,
(6)
CA GDPit = β 1 + β 2 (CA)t −1 + β 3 (w)it + β 4 ( y )it + β 5 ( p )it
+ β 6 (d x )it + β 7 (d m )it + β 8 (TOT )it + β 9 (lib )it + β10 ( y × lib )it + β11 (aid )it + β12 (aid × lib )it + ε it
11
where TBt −1 and CAt −1 are lagged dependent variables; w is the growth of world
income; y is the growth of domestic income; p is the rate of change of the real exchange
rate; dx is export duties as a share of total exports; dm is import duties as a share of total
imports; TOT the nominal (‘pure’) terms of trade, measured as the ratio of export to
import prices; lib is a liberalization shift dummy; aid is the ratio of aid to GDP; and
y×lib and aid×lib are the interaction (slope) dummy variables to take account of the
impact that liberalization may have on growth and aid and, therefore, on the balance of
payments. The expected signs of the coefficients are β 2 > 0 , β 3 > 0 , β 4 ( < 0 ) ,
β6 < 0 β7 > 0 and β 8 > 0 . The signs of the p( β 5 ) lib ( β 9 ), aid ( β 11 ) y × lib ( β 10 ) and
aid×lib ( β 12 ) coefficients are to be determined.
4.2 Estimations and results
Tables 5 and 6 present the results concerning the impact of trade liberalization on the
trade balance and the current account. All explanatory variables affect the trade balance
in the expected fashion. Specifically, world income growth has a significant positive
effect; domestic income growth has a significant negative effect; the trade balance is
positively related to the real exchange rate (although the impact is minimal), and the
pure terms of trade effect is negative.
Reductions in export duties have significantly improved the trade balance, whereas a
decline of import duties has deteriorated it. Furthermore, the process of trade
liberalization seems to have worsened the trade balance. The findings also indicate that
liberalization has improved growth performance, which has deteriorated the trade
balance. Using a similar framework, Santos-Paulino and Thirlwall (2004) analyse the
influence of trade liberalization on exports, imports and the balance of payments for a
sample of developing and LDCs that have also liberalized in the context of structural
adjustment and/or multilateral trade commitments. Their results uphold the observation
that liberalization has stimulated export growth, but has raised import growth by more,
leading to a worsening of the balance of trade and the balance of payments. However
the authors do not assess the impact of foreign capital or aid, or how financial inflows
might be influenced by the liberalization process.
The coefficients of the aid variable indicate that inflows are contributing to the
financing of the trade deficits in our sample of countries. The impact of trade
liberalization on the trade balance through aid is also positive and statistically
significant. The impulse dummies confirm the ‘J-curve type’ effect of trade
liberalization on the trade balance.
Turning to the current account of the balance of payments shown in Table 6, the results
relate to those of the trade balance, indicating that trade liberalization has also worsened
the current account for our sample of countries. However, the marginal impacts of
export and import duties on the current account balance are smaller than those of the
policy reform. The current account balances comprise not only goods and services but
also other current transactions such as interest payments and profit flows. However,
these items have more to do with financial liberalization, and have no systematic
relation with export and import behaviour. The coefficients of the aid variable and aid
slope dummies are also statistically significant, confirming that capital inflows have
12
helped to fund the deficits generated by liberalization, and making it easier also to
adjust the current account to a sustainable level.
Table 5
Trade liberalization and the trade balance, 1970-2001
Explanatory variables
Dependent variable: trade balance/GDP ( tb )
(i)
(ii)
(iii)
(iv)
Lagged trade balance ratio ( tb−1 )
0.98
(5.80)**
0.97
(5.70)**
0.98
(5.69)**
0.97
(6.83)**
World income growth ( w )
0.23
(2.59)*
0.31
(2.73)*
0.16
(2.39)*
0.31
(2.77)*
-0.21
(3.14)**
-0.20
(2.50)*
-0.26
(2.26)*
-0.29
(2.63)*
Income growth (
RER growth (
y)
p)
-0.01
(0.96)
-0.01
(0.89)
Export duties ( d x )
-0.10
(0.29)
-0.18
(0.14)
-0.13
(1.16)
-0.24
(0.31)
Import duties ( d m )
0.13
(0.35)
0.15
(0.48)
0.19
(0.27)
0.16
(0.15)
-4.01
(2.07)*
-1.30
(3.21)**
Liberalization (shift,
lib )
Liberalization (impulse
d1 )
-1.55
(2.21)*
-1.10
(1.29)
Liberalization (impulse
d2 )
-0.41
(2.25)*
-0.05
(2.34)*
Liberalization (impulse
d3 )
-0.01
(0.44)
-0.02
(1.31)
Aid (Aid/GDP)
y* lib
Aid*lib
0.71
(2.58)*
0.95
(2.23)*
0.67
(2.54)*
0.81
(2.27)*
-0.09
(2.04)*
-0.33
(2.91)*
-0.23
(2.17)*
-0.19
(2.82)*
0.68
(1.17)
0.13
(2.72)*
0.16
(2.25)*
0.13
(2.83)*
-0.09
(1.12)
TOT
0.01
(0.39)
Diagnostic statistics
Wald test
[0.000]
[0.000]
[0.000]
[0.000]
Sargan test
[0.368]
[0.438]
[0.853]
[0.391]
1st-order serial correlation
[0.000]
[0.000]
[0.000]
[0.000]
2nd-order serial correlation
[0.249]
[0.166]
[0.248]
[0.163]
545
545
545
545
Number of observations
Notes:
See Table 3.
13
Table 6
Trade liberalization and the current account, 1970-2001
Dependent variable: current account/GDP (ca)
Explanatory variables
(i)
(ii)
(iii)
(iv)
Current account ratio ( ca t-1)
0.63
(8.19)**
0.33
(4.60)**
0.63
(3.26)**
0.33
(4.69)**
World income growth ( w )
0.42
(2.28)*
0.86
(2.55)*
0.42
(2.29)*
0.80
(2.51)*
-0.18
(2.39)*
-0.18
(2.89)*
-0.18
(2.67)*
-0.18
(2.05)*
Income growth (
RER growth (
y)
-0.004
(1.39)
p)
-0.004
(1.37)
Export duties ( d x )
-0.01
(0.38)
-0.02
(0.94)
-0.01
(0.23)
-0.02
(2.32)*
Import duties ( d m )
0.01
(0.33)
0.02
(1.63)
0.01
(0.37)
0.06
(1.68)ζ
-0.70
(2.77)*
-1.98
(2.27)*
Liberalization (shift,
lib )
Liberalization (impulse
d1 )
-0.80
(2.67)*
-0.97
(5.08)**
Liberalization (impulse
d2 )
-0.61
(2.04)*
-1.05
(3.08)**
Liberalization (impulse
d3 )
0.81
(2.50)*
0.31
(3.64)**
Aid (Aid/GDP)
y* lib
Aid*lib
0.14
(4.37)**
0.30
(2.47)*
0.17
(3.49)**
0.16
(2.32)**
-0.28
(1.78)ζ
-0.55
(2.88)**
-0.28
(1.78)ζ
-0.41
(2.90)*
0.22
(2.84)**
0.14
(1.96)ζ
0.22
(7.87)**
0.19
(1.98)*
-0.02
(2.70)*
TOT
-0.02
(2.63)*
Diagnostic statistics
Wald test
[0.000]
[0.000]
[0.000]
[0.000]
Sargan test
[0.189]
[0.282]
[0.511]
[0.285]
1st-order serial correlation
[0.000]
[0.000]
[0.000]
[0.000]
2nd-order serial correlation
[0.400]
[0.200]
[0.399]
[0.199]
545
545
545
545
Number of observations
Notes:
4
See Table 3.
Conclusion
Overall, the paper’s findings have important policy implications, particularly the higher
import growth in contrast with the more modest export growth following trade
liberalization. It raises the issue of the sequencing of the liberalization of exports and
imports, that is, import liberalization should be appropriately sequenced or combined
14
with effective measures designed to improve competitiveness and to promote exports.
The lack of an appropriate combination of domestic policies and liberalization—both
trade and financial—was one of the main factors behind the balance of payment crises
affecting developing countries in the early 1980s, as Khan and Zahler (1985) note.
Moreover, the fact that the impact of trade liberalization on import growth is higher than
its effect on export growth implies that the shift to a liberalized trade regime exacerbates
aid dependence and, to the extent that aid is not provided in grants and is not building
up trade capacity, it has increased the likelihood of another debt crises in the future, as
well as the problem of sustainable financing of the trade deficit.
The financing and sustainability of the trade account deficit in the reforming countries
will depend not only on the outcome of trade liberalization, but on other
macroeconomic policies (particularly those that influence demand), developments in the
real exchange rate and the inflows of foreign capital. With regard to the financing of the
trade deficit, financial liberalization could be a vehicle to ensure such financing,
because this would help to attract foreign capital in search of high returns, allowing
them to increase their investment (in relation to savings) without running into payments
constraints. Also, a higher flow of foreign direct investment would further accelerate
growth not only by supplementing domestic resources for capital accumulation, but also
through technological transfers and knowledge.
The results concerning the current account effects of liberalization indicate that the
countries under review have had difficulties in financing the foreign exchange
consequences of trade policy reform, and have had to adjust their economies according
to the level of sustainable capital inflows (e.g., foreign aid or official development
assistance). On the other hand, the liberalization of the capital account, intended mostly
to mobilize private external financing, could have also affected the management of
foreign exchange and henceforth the overall payments positions of the countries.
Instability in financial flows and the resulting misalignments and fluctuations of
exchange rates worsen payments difficulties by discouraging investment in
traded-goods industries. Thus, capital flows could widen the resource gap through their
adverse effects on exchange rates, imports and exports, rather than being driven by the
requirements of the current account.
15
Appendix: Data definitions and sources
Aid (aid):
Official development assistance and official aid. Source: World Bank
(2002).
Aid (aid/GDP): Official development assistance and official aid (current US$) as a
share of nominal GDP. Source: World Bank (2002).
Export growth (x): Exports of Goods and Services; annual percentage growth constant
1995 US$). Source: World Bank (2002).
Export duties (dx): Export duties (per cent of exports); includes all levies collected on
goods at the point of export. Source: World Bank (2002).
Import duties (dm): Import duties (per cent of imports). Import duties comprise all levies
collected on goods at the point of entry into the country. They include
levies for revenue purposes or import protection, whether on a
specific or ad-valorem basis, providing they are restricted to imported
products. Data are shown for central government only. Source: World
Bank (2002).
Rate of change of relative prices (px and pm) used in the export and import demand
functions is measured by the real exchange rate (RER) defined as
⎛ EPd ⎞
, where E is the nominal exchange rate measured as the
⎜
Pf ⎟⎠
⎝
⎛P
⎞
foreign price of domestic currency and ⎜ d ⎟ is the ratio of
P
f ⎠
⎝
domestic to foreign prices. Source: World Bank (2002) and IMF’s
International Financial Statistics (various issues).
Import growth (m): Imports of Goods and Services; annual percentage growth (constant
1995 US$). Source: World Bank (2002).
Income growth (y): GDP; annual percentage growth (constant 1995 US$). Source:
World Bank (2002).
World income growth (w): World GDP; annual percentage growth (constant 1995 US$).
Source: World Bank (2002). The activity variable is defined as the
difference between world GDP and country GDP, that is:
WYi = WorldGDP − GDPi .
16
Appendix Table A1
Trade and exchange rate liberalization policies
Bangladesh
1980
-
1985-86
-
1991
-
1991-92
-
1994
-
1997-99
-
Benin
1991
-
1994
-
Burundi
2002-03
-
Gambia
1985
-
-
Guinea
The Foreign Private Investment Act was adopted, containing
provisions for non-discrimination of FDI against domestic investment.
Implementation of a SAF programme, aimed at rationalizing tariffs
and other import taxes, eliminating import prohibitions and other
restrictions.
Replacement of the positive lists of imports by a negative one.
Incentives to support export promotion programmes such as bonded
warehouse facilities and a duty drawback scheme were introduced
A new industrial policy was adopted, aimed at promoting
liberalization and private sector development. It also provided priority
treatment for export-oriented industries.
The tariff regime was rationalized and simplified: the number of
bands was decreased from 15 to 5 and the maximum rate from 300
to 37.5%.
Tax incentives were introduced to attract FDI. The multiple sales tax
was replaced by a 15% VAT levied on imports and domestically
produced goods.
The exchange rate was unified and the foreign account holdings
liberalized.
The taka became convertible internationally.
Additional reductions of QRs and tariffs. Trade liberalization was
continued.
The tariff reforms decreased the number of taxes levied on imports to
two, and the range of duty rate contracted from 15 to 5.
A VAT of 18% was introduced.
Benin joined WAEMU.
The tariffs on all products originated within the Community member
states were eliminated and import tariffs with respect to non-WAEMU
countries were reduced.
The CFA franc was devalued against the French franc.
Simplification of the import licensing process.
The tariff scheme was simplified and the number of bands reduced to
four. The maximum import tax rate was decreased. A simplification of
the custom procedures was also undertaken.
Exchange rate devaluation.
The government strategy changed in favour of export-oriented type of
policies. This had been preceded by a devaluation of the exchange
rate.
Abolition of licensing and quotas.
1998
-
The tariff scheme was simplified. Only four bands were used and the
maximum rate was lowered to 18%.
1985-86
-
Progressive trade liberalization comprising the elimination of QRs on
most products, and reduction of import duties. Export restrictions and
licences were abolished on the majority of products.
A monetary reform introduced a new currency.
Elimination of State Marketing Boards.
Price controls were gradually streamlined and only oil products were
regulated.
The Guinean Franc was launched.
-
Appendix Table A1 continues
17
Appendix Table A1 (con’t)
Trade and exchange rate liberalization policies
Guinea (con’t)
Lesotho
1991
-
1993
-
An Enhanced SAP with the IMF was signed. Structural reforms restarted.
Tax advantages were given to exporting firms
The banking sector was liberalized
1996
-
A VAT of 18% was levied on imports of local products.
1997
-
The exchange rate became market determined, and an inter-bank
rate was created.
1984
-
1988
-
1994
-
The Customs and Excise Act gave effect to tariff policy under the
SACU agreement with common customs and excise duties on goods
imported from third countries set by S. Africa as well as duty-free
circulation of goods within SACU.
A SAP was implemented. It included public sector reform, investment
incentives and a reform in the tax system.
Tariff efforts were accelerate by South Africa, consequently the
average common tariff rate was reduced. Agricultural price controls
were liberalized and state monopolies privatized.
QRs were dismantled.
-
Madagascar
1995-96
-
2000
-
2001
-
The dual exchange rate system was abolished, and the privatization
programme was launched. A sharp depreciation of the US dollar
following the South African rand.
The Trade Cooperation and Development Agreement was signed
between SACU and the EU. SACU tariff rates rat o be reduced to half
the bound rates over 8 years.
Tariff reduction agreement between SACU and the US.
1982
-
The economic reforms started to be implemented gradually.
1988
-
1999
-
All non-tariff barriers were eliminated and replaced by ad-valorem
rates. On the same year the Malagasy franc was devalued and then
pegged to a currency basket.
The tariff schedule was simplified and the number of bands
decreased from six to four.
The maximum rate decreased to 30%.
With some exceptions, all export duties have been eliminated.
Malawi
1988-89
-
1991
-
1994-95
-
1996-97
-
-
An SAP was introduced, under which the tariff schedule was unified,
and duty rates on imports started to be lowered.
The exchange rate was devalued by 15% against the currency
basket and exchange controls started to be relaxed.
Export promotion activities were introduced, including tax allowance
and duty drawback schemes, technical assistance and transport
subsidies.
The Investment Promotion Act was introduced to facilitate domestic
and foreign investment (ratified in 1998).
A negative list of imports requiring foreign exchange approval was
introduced (and abolished in 1994).
Export processing zones started to be developed.
State-owned enterprises started to be privatized.
Most non-tariff barriers were removed, including licensing
requirements and quotas. The maximum rates were lowered to 35%,
and tariffs on raw materials used in manufacturing eliminated.
An integrated trade and industrial policy was adopted to stimulate the
private sector, including the reduction of corporate taxes.
Exports taxes and foreign exchange rationing were removed.
Appendix Table A1 continues
18
Appendix Table A1 (con’t)
Trade and exchange rate liberalization policies
Malawi (con’t)
2000-01
-
A Free Trade Area with other COMESA members was created.
The Trade Protocol establishing SADC-free trade area was signed.
Although most non-tariff measures were eliminated, new ad hoc
measures were introduced.
Mauritania
1992
-
Overall economic reforms and trade liberalization started. Reforms
included prices liberalization, exchange rate liberalization, and
privatization of state enterprises.
Elimination of most non-tariff barriers and constraints on capital
movements.
The tariff rates were decreased and the schedule was rationalized.
The number of rates decreased to four and the maximum duty
reduced from 30 to 20%.
-
Mozambique
2000
-
1987
-
1990
-
1992
-
1999
-
-
Nepal
The majority of QRs and exchange controls were eased and/or
eliminated. The tariff schedule was simplified and the number of
bands reduced.
Export registration requirements and licenses were removed.
Foreign exchange controls were eliminated.
A VAT of 17% was introduced, replacing the turnover and
consumption taxes. Corporate and personal income taxes were
reduced.
The Mozambican Stock Exchange rate was created.
All tariffs were bound to current rates.
2000-01
-
Preferential tariff treatment was granted to all members of SADC.
The tariff structure was simplified once more, and the maximum rate
was reduced from 30 to 25%.
1986
-
The launching of the SAP allowed for a large tariff structure
rationalization as well as duty reductions.
An import license auction system for the liberalization and facilitation
of exports was introduced.
QRs and import licenses were eliminated, and major market oriented
policies were adopted.
The new Foreign Investment and Technology Transfer Act and the
Industrial Enterprises Act came into force, facilitating the creation of
new enterprises.
-
Senegal
The Economic Rehabilitation Programme was introduced to start the
liberalization of the economy.
The privatization of the majority of state-owned enterprises was
accomplished by 1999.
The export promotion institute was created to sponsor exports.
1986
-
-
1994
-
-
The long-term structural adjustment plan dictated a fall and a
harmonization of the tariff rates. It also established the elimination of
many non-tariff measures and import licensing. The agricultural
sector was deregulated and the state enterprises started to be
privatized.
After the introduction of minimum customs tax assessments, a
greater use of reference prices, and an increase in the custom duties,
the effective rate of protection increased in 1989.
The tariffs on all products originated within the Community member
states were eliminated and import tariffs with respect to non-WAEMU
countries were reduced.
In the same year, the CFA franc was devalued against the French
franc.
Appendix Table A1 continues
19
Appendix Table A1 (con’t)
Trade and exchange rate liberalization policies
Tanzania
1986
-
The Economic Recovery Programme of 1986 liberalized the
exchange rate system and eliminate foreign exchange controls.
Efforts were undertaken to decrease government control over the
economy as well as to encourage private sector activities.
-
The real exchange rate started to depreciate.
-
The import duty reform simplified the tariff structure implementing a
five-tier tariff structure. The highest tariff rate of 30% was eliminated.
-
Export taxes were abolished.
1988
-
The SAP included measures aimed at reforming the public sector,
dismantling the majority of QRs, and eliminating the export licenses
for the local industrial products.
1994
-
The tariffs on all products originated within the Community member
states started to be eliminated and import tariffs with respect to nonWAEMU countries were reduced.
-
The CFA franc was devalued against the French franc.
1996
-
Import licenses as well as export monopolies of the base products
were eliminated.
1987
-
The Economic Recovery Programme started the elimination of QRs
and the liberalization of export monopolies. Import and export
licenses were granted to private firms.
-
The exchange rate was devalued by around 70% and the exchange
rate regime was reformed.
-
FDI started to be promoted.
-
The adoption of the three-year SAP included the privatization of
state-owned enterprises, the phasing out of non-tariff barriers and a
simplification of the tariff regime (the tariff categories were reduced
from 12 to 4) and planning for a gradual lowering of the tariff rates.
1999
Togo
Uganda
Zambia
1991-92
Note:
COMESA: Common Market for Eastern and Southern Africa;
QRs: quantitative restrictions;
SACU: South African Currency Union;
SADC: Southern Africa Development Community;
SAF: Structural Adjustment Facility;
SAP: Structural Adjustment Programme;
VAT: value added tax;
WAEMU: West African Economic and Monetary Union.
Source: Borgatti (2003); Santos-Paulino and Thirlwall (2004), and WTO Trade Policy Review (various
issues).
20
Appendix Table A2
Initial overall rating and targeted change in trade policy restrictiveness rating
in selected least and developing countries
Country/agreement
Initial overall
rating
Targeted
overall
change
Targeted
NTB change
Targeted
tariff change
Final overall
rating
LDCs
Mozambique (1990) ESAF
10
-4
-1
-2
6
Zimbabwe (1992) ESAF, EFF
10
-4
-1
-2
6
Burkina Faso (1993) SAF
10
-3
-1
0
7
Bangladesh (1990) ESAF
10
-2
-1
0
8
Ethiopia (1992) SAF
10
-2
-1
0
8
Burkina Faso* I (1991) ESAF
10
0
0
0
10
Tanzania (1991) ESAF
9
-4
-1
-1
5
Mauritania* (1992) ESAF
9
0
0
0
9
Mali (1992) ESAF
8
-3
-1
0
5
Lesotho* (1991) ESAF
8
0
0
0
8
Nepal (1992) ESAF
7
-4
-1
-1
3
Zambia (1992) ESAF
7
-3
-1
0
4
Benin* (1993) ESAF
6
-3
-1
0
6
Comoros (1991) SAF
10
-2
-1
0
8
Guyana (1990) ESAF
10
-2
0
-2
8
Jordan* (1992) SB
Developing countries
10
0
0
0
10
Panama* (1992) SB
8
-4
-1
-1
8
Philippines* (1991) SB
8
0
0
0
8
Sri Lanka (1991) ESAF
7
-5
-1
-2
2
Equatorial Guinea (1993) ESAF
5
-2
0
-2
3
Argentina (1992) EFF
5
0
0
0
4
Sierra Leone (1992) ESAF
5
0
0
0
4
Jamaica (1992) EFF
4
-1
0
-1
3
Mongolia* (1993) ESAF
3
0
0
0
3
Peru* (1993) EFF
3
0
0
0
3
Notes:
Each programme’s effectiveness date is indicated in parenthesis. The classification scheme for
Overall Trade Restrictiveness is a combined index, which includes tariff and non-tariff barriers.
The index ranks from 1 to 10, where 1 is the more open category and 10 is considered as
restrictive. EFF means extended fund facility; SAF: structural adjustment facility; ESAF:
enhanced structural adjustment facility; SB: stand-by agreement.
* Indicates that the country did not change (i.e., reduced) trade policy restrictiveness from the
initial to the final overall rating.
Source: Santos-Paulino (2005).
21
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