Export Competitiveness:
The Incentive Framework
Paul Brenton
International Trade Department
World Bank
April 2008
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
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)?
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
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
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
Tariffs and resource allocation
Example: Kenya has reduced its tariffs …but its average
tariff is still above the fast-growing economies
Simple average tariff [%]
35
30
Kenya
25
20
Fast growing economies
15
10
5
0
1995
2005
Source: Bank staff calculations, based on UNCTAD TRAINS
12 of 16 Fast growing economies; does not include India, Botswana, Burkina Faso and Cambodia due to data limitations
Tariffs and resource allocation
Example:Tanzania still has a relatively large
number of tariff peaks
Share of total tariff lines
Graph 1: Distribution of tariff lines Tanzania vs. High Performing Countries
50%
45%
40%
35%
HP 16
HP 16
Tanzania
Tanzania
30%
25%
Tanzania
20%
15%
HP 16
10%
5%
0%
<5%
5% to 20%
> 20%
Tariffs and resource allocation
Example: Effective rates of protection vary
significantly across sectors in Morocco
Tariffs and revenues
Need to look at revenues from trade:
exemptions, VAT and excises matter - an example from
Mauritius
Taxes collected and exempted on imports
12
10
duties exempted
8
duties collected
6
4
2
tariff duties
excise duties
VAT
0
2000 2001 2002 2003 2004 2005
2000
2001 2002 2003 2004 2005
2000 2001 2002 2003 2004 2005
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
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
Tariffs, employment and adjustment
Example: Mauritius - Tariffs and employment
70
60
199
0?
Employment
9509
50
3361
Tariff rate
40
30
1040
47443 0?
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?
2543
20
217 0?
8024 0?
2133 286
98 1093
3123
10
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0
Tariffs, employment and adjustment
In some sectors, the annual cost of protection
exceeds the (one-off) costs of retraining labour
thousands of Rupees
Estimated annual deadweight loss per job protected
1,704
100
960
Graph shows the ten sectors
With the highest deadweight
losses from protection
employment
89
375
Estimated
cost of retraining a
worker
221
50
283
2,352
529
10,260
45,493
0
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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
0
Estimated change in industrial employment from removing all duties
Total
Furniture
Clothing
Beverages
-20.6
Printing
-17.5
Footwear
-34.7
-3.4
-2,000
-4,000
Male
Share of sector employment
-6,000
-63.9
-8,000
Female
-10,000
-10.1
-12,000
Share of industrial employment 2005
Tariffs, employment and adjustment
Displaced workers may end up in sectors with
higher wages
Estimated wage differentials for men and women by sector, compared to EPZ
Manufacturing
100%
Shows ratio of average wage for
women in sector relative to that for
women in EPZ manufacturing
80%
60%
male
40%
female
20%
ot
he
r
icu
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M
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at
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Ve
g
Z
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-40%
EP
Ho
r
-20%
Ag
r
tic
ul
tu
re
0%
Based on regression results on Household Budget Survey 2006/7 data, controlling for age
and education of worker.
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!)
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
Overseas markets matter
Opportunities to aggressively pursue improved
access to overseas markets……
Duties on key agricultural products exported by Tanzania - 2005
India
Cashews unshelled 30
shelled
30
preference
for Africa
China
20 (10)
10
Brazil
10
10
unroasted 100
roasted
100
8 (0)
15
10
10
2 (0)
8
40
40
0
0
13 (11)
13 (11)
Tea
100
15
10
40
60
0
145
Dried peas
50
5
10
27
30
5
9
Dried beans
30
7
10
27
30
5
9
Coffee
Korea Thailand Saudi Arabia Turkey
8 (0)
40
5
30
8 (0)
40
5
30
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%
Overseas markets matter
Enormous potential for developing countries to reach new
geographic markets with existing products…
Export Market Penetration 1985 to 2005: Kenya and Korea
45
35
30
25
Korea
20
15
Kenya
10
5
0
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Index of Export Market Penetration
40
Overseas markets matter
Albania reaches relatively few export markets for
the products it exports…..
Exports of Albania in 2004
16
Log of Value of Exports of Product
14
12
10
8
6
4
2
0
0
10
20
30
40
50
60
Number of Export Markets
70
80
90
100
Overseas markets matter
…while Romania reaches more markets for the
products exported by Albania
Exports by Romania of Products Exported by Albania in 2004
16
Log of Value of Exports by Product
14
12
10
8
6
4
2
0
0
10
20
30
40
50
Number of Markets
60
70
80
90
100
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
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)
Incentives: taxes
Corporate tax policy makes capital cheaper than labor and
renders incentives powerless
50
Marginal Effective Tax Rates on Capital
40
30
20
-30
-40
Source: World Bank staff and Sosa (2006)
Mauritius
St Lucia
Grenada
Dominica
Antigua
Sweden
Ireland
Mexico
U.K.
Finland
Australia
Netherlands
Norway
Spain
France
Japan
Russia
Italy
New Zealand
-20
Germany
-10
U.S.
0
Canada
10
Incentives: taxes
Tax policy makes capital cheaper than labor and renders
incentives powerless… with no apparent rationale
0%
Manufacturing
Agriculture
-3%
-2%
-5%
Tourism
Services
-10%
-15%
-16%
-20%
-25%
-20%
-22%
METR without
incentives
-30%
-35%
-34%
METR with
incentives
-40%
-45%
-45%
-50%
Source: World Bank
-42%
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
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
Tools: TRIST
TRIST
CUSTOMS: Data on
imports and tariff,
excise and VAT
revenue by product
and trading partner
NATIONAL
STATISTICS: Data
on domestic output
and employment by
sector
USER: Definition of
tariff reform
scenarios
TRIST:
A single Excel file
containing all data,
tariff reform definitions
and a simple partial
equilibrium model
of importing
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
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
Tools: TRIST
WITS / SMART
TRIST
Data source
UNCTAD TRAINS
National customs authorities
(collection can be cumbersome)
Tariff revenue
data
Calculated as tariff rate x
import value -> no exemptions
taken into account, problem
with non-ad valorem tariffs
As collected by customs
VAT and excise
revenue
No
As collected by customs
Software
WITS browser -> installation
and access to server is
required
Excel spreadsheet, all formulas can
be viewed and modified by user
Domestic
Production
No
Domestic output data by sector,
assuming constant ratio between
imports and domestic production for
products within the same sector
Coverage
World
Country-specific
Results
Imports, welfare, tariff revenue
by HS6 (sometimes HS8) digit
product and partner
Imports and tariff, excise and VAT
revenue at tariff line level and by
partner, output and employment