export competitiveness: the incentive framework

Export Competitiveness:Export Competitiveness: The Incentive Framework The Incentive Framework

Paul BrentonPaul BrentonInternational Trade DepartmentInternational Trade Department

World BankWorld Bank

April 2008April 2008

OutlineOutline

Why the incentive framework mattersWhy the incentive framework matters

Tariffs and resource allocationTariffs and resource allocation

Tariffs and revenuesTariffs and revenues

Tariffs, employment and adjustmentTariffs, employment and adjustment

Looking at overseas markets Looking at overseas markets

Tax and labour policiesTax and labour policies

Tools and DataTools and Data

Incentive framework: key issuesIncentive framework: key issues

Do tariff, tax and labor lawsDo tariff, tax and labor laws– Encourage investment to serve the Encourage investment to serve the

domestic market over exports?domestic market over exports?– Favour large firms over small firms?Favour large firms over small firms?– Support old firms/sectors over new activities?Support old firms/sectors over new activities?– Encourage investment in capital over investment Encourage investment in capital over investment

in people?in people?– Discourage foreign investment relative to Discourage foreign investment relative to

domestic investment (or vice versa)? domestic investment (or vice versa)?

Incentives - introductionIncentives - introduction

The Real Exchange RateThe Real Exchange RateConcerns with unstable and over-valued ERConcerns with unstable and over-valued ER– But how to identify over-valuation - different But how to identify over-valuation - different

methodologiesmethodologies

RER depends on many factorsRER depends on many factorsCapital inflows for investment, remittances, aid flows etcCapital inflows for investment, remittances, aid flows etcProductivity growth in response to reformsProductivity growth in response to reforms

Tradables –> appreciationTradables –> appreciationNon-traded -> depreciationNon-traded -> depreciation

Policies that are good for the economy will tend to Policies that are good for the economy will tend to reinforce real depreciationreinforce real depreciation– Improve productivity in key non-traded sectors (transport, Improve productivity in key non-traded sectors (transport,

telecoms, energy)telecoms, energy)– Further trade liberalization Further trade liberalization – Gradually shift in reliance for macro management to Gradually shift in reliance for macro management to

fiscal policyfiscal policy


The pros and cons of keeping substantial trade The pros and cons of keeping substantial trade protectionprotection

The case for trade protectionThe case for trade protection– In many low income countries tariffs are a major source of revenueIn many low income countries tariffs are a major source of revenue– Protected sectors provide an important source of income for the poorProtected sectors provide an important source of income for the poor– Particular industries need time to adjust to globalisation Particular industries need time to adjust to globalisation – Resources in these sensitive sectors face particularly high costs of Resources in these sensitive sectors face particularly high costs of

adjustment with potentially important impacts on povertyadjustment with potentially important impacts on poverty

Costs of maintaining protectionCosts of maintaining protection– Anti-export bias, raises cost of intermediatesAnti-export bias, raises cost of intermediates– resources stuck in low productivity activities – could be earning higher resources stuck in low productivity activities – could be earning higher

returns in expanding export and efficient import competing sectors returns in expanding export and efficient import competing sectors – Limits investments by firms and workers to become more productive Limits investments by firms and workers to become more productive – Impact on customs resources and reform – delays dealing with NTBsImpact on customs resources and reform – delays dealing with NTBs– Impact on poverty – protected products may form a high share of the Impact on poverty – protected products may form a high share of the

consumption bundle of the poor consumption bundle of the poor – Risk of trade diversion – most countries are party to regional and/or Risk of trade diversion – most countries are party to regional and/or

bilateral preferential trade agreementsbilateral preferential trade agreements


Tariffs and protectionTariffs and protection IssuesIssues– Does the structure and level of tariffs entail a bias Does the structure and level of tariffs entail a bias

against exports?against exports?– Is the tariff schedule complex and difficult for Is the tariff schedule complex and difficult for

customs to apply? customs to apply?

IndicatorsIndicators– Average tariff relative to countries with strong Average tariff relative to countries with strong

growthgrowthWeighted/unweighted, MFN, Statutory, appliedWeighted/unweighted, MFN, Statutory, applied

– Dispersion and complexity of tariffsDispersion and complexity of tariffsEscalation, Effective protection, Non-ad valorem dutiesEscalation, Effective protection, Non-ad valorem duties

– OTRIOTRI

Tariffs and resource allocation

Example: Kenya has reduced its tariffs …but its average Example: Kenya has reduced its tariffs …but its average tariff is still above the fast-growing economiestariff is still above the 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

0

5

10

15

20

25

30

35

1995 2005

Fast growing economiesFast growing economies

Simple average Simple average tariff [%]tariff [%]

KenyaKenya


Example:Tanzania still has a relatively large Example:Tanzania still has a relatively large

number of tariff peaksnumber of tariff peaks

HP 16

Tanzania

HP 16

Tanzania

HP 16

Tanzania

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Shar

e of t

otal

tari

ff lin

es

<5% 5% to 20% > 20%

Graph 1: Distribution of tariff lines - Tanzania vs. High Performing Countries


Example: Effective rates of protection vary Example: Effective rates of protection vary significantly across sectors in Moroccosignificantly across sectors in Morocco


Need to look at revenues from trade: Need to look at revenues from trade: exemptions, VAT and excises matter - an example from exemptions, VAT and excises matter - an example from MauritiusMauritius

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005

Taxes collected and exempted on imports

tariff duties excise duties VAT

duties collected

duties exempted

Tariffs and revenues

Sources of Tariff and Customs DataSources of Tariff and Customs Data

Tariff schedulesTariff schedules– Government Government – WITS WITS

Summary information and indicatorsSummary information and indicators– WTIWTI– ITC MacMapITC MacMap– World Tariff ProfilesWorld Tariff Profiles– WTO Trade Policy ReviewsWTO Trade Policy Reviews– IMF reports (aggregate customs collections)IMF reports (aggregate customs collections)

Customs/Revenue AuthorityCustoms/Revenue Authority


How much employment are tariffs protecting?How much employment are tariffs protecting?– The cost per job protectedThe cost per job protected

The adjustment implications of tariff reformThe adjustment implications of tariff reform– Will adjustment be concentrated in particular sectors, Will adjustment be concentrated in particular sectors,

particular groups of workers…?particular groups of workers…?

Measures to ease adjustmentMeasures to ease adjustment– Support for enterprise restructuring and skill Support for enterprise restructuring and skill

upgrading within sectorsupgrading within sectors– Training and social safety for workers moving to new Training and social safety for workers moving to new

sectors and occupationssectors and occupations

Tariffs, employment and adjustment

Example: Mauritius - Tariffs and employmentExample: Mauritius - Tariffs and employment

0

10

20

30

40

50

60

70

Tobac

co

Parts

for M

otor

Veh

icles

Furnit

ure

Bever

ages

Footw

ear

Cloth

ing

Electr

ic La

mps

Accum

ulato

rs a

nd B

atte

ries

Printin

g

Rubbe

r Pro

ducts

Oth

er T

rans

port

Equip

men

t

Oth

er F

ood P

rodu

cts

TV/Rad

io R

eceiv

ers

Non-m

etal

lic m

iner

al pro

ducts

Glas

s

Oth

er E

lectr

ical E

quipm

ent

Leat

her

Struct

ural

Meta

l Pro

ducts

EmploymentEmployment

199199

0?0?

9509950933613361

1093109331233123

9898

104010404744347443

25432543

28628621332133

0?0?0?0?

0?0?0?0?

21721780248024

Tariff rateTariff rate

Of 57 manufacturing Of 57 manufacturing sectors, only 17 sectors sectors, only 17 sectors have protection of an have protection of an average tariff of average tariff of greater than 10 per greater than 10 per cent. The average cent. The average tariff for 24 sectors is tariff for 24 sectors is less than 1 percent. For less than 1 percent. For 8 sectors the average 8 sectors the average tariff lies between 1 tariff lies between 1 and 5 per cent. and 5 per cent.


In some sectors, the annual cost of protection In some sectors, the annual cost of protection exceeds the (one-off) costs of retraining labourexceeds the (one-off) costs of retraining labour

Estimated annual deadweight loss per job protected

0

50

100

thou

sand

s of

Rup

ees

Estimated Estimated cost of re-cost of re-training a training a workerworker

1,7041,704

529529

960960

2,3522,352

8989 375375221221

283283

10,26010,26045,49345,493

employmentemployment Graph shows the ten sectorsGraph shows the ten sectorsWith the highest deadweight With the highest deadweight losses from protectionlosses from protection


Example: In Mauritius, moving to a “duty free island” Example: In Mauritius, moving to a “duty free island” would displace a small number of workers, but a few would displace a small number of workers, but a few sectors would suffersectors would suffer

-12,000

-10,000

-8,000

-6,000

-4,000

-2,000

0

Total Furniture Clothing Beverages Printing Footwear

-10.1-10.1

-20.6-20.6 -17.5-17.5 -34.7-34.7

Share of sector employmentShare of sector employment

Share of industrial employment 2005Share of industrial employment 2005

MaleMale

FemaleFemale

Estimated change in industrial employment from removing all duties

-3.4-3.4

-63.9-63.9


Estimated wage differentials for men and women by sector, compared to EPZ Manufacturing

-40%

-20%

0%

20%

40%

60%

80%

100%

malemalefemalefemale

Based on regression results on Household Budget Survey 2006/7 data, controlling for age Based on regression results on Household Budget Survey 2006/7 data, controlling for age and education of worker.and education of worker.

Shows ratio of average wage Shows ratio of average wage for women in sector for women in sector relative to that for women relative to that for women in EPZ manufacturingin EPZ manufacturing

Displaced workers may end up in sectors with Displaced workers may end up in sectors with higher wageshigher wages


Sources of Data Sources of Data

Employment/OutputEmployment/Output– National industrial censusNational industrial census– Continuous surveysContinuous surveys– UNIDOUNIDO

Wages/Incomes by sectorWages/Incomes by sector– National labour statisticsNational labour statistics– Household budget surveysHousehold budget surveys

UnemploymentUnemployment– By duration, type of worker, previous sector of By duration, type of worker, previous sector of

employment etc (good luck!)employment etc (good luck!)


Overseas markets matter!Overseas markets matter!

Market access conditionsMarket access conditions– Applied tariffs in overseas marketsApplied tariffs in overseas markets– Export OTRIExport OTRI– Preferences and rules of originPreferences and rules of origin

Measuring success in reaching overseas Measuring success in reaching overseas marketsmarkets– Index of export market penetrationIndex of export market penetration

Opportunities to aggressively pursue improved Opportunities to aggressively pursue improved access to overseas marketsaccess to overseas markets…………

Duties on key agricultural products exported by Tanzania - 2005India China Brazil Korea Thailand Saudi Arabia Turkey

Cashews unshelled 30 20 (10) 10 8 (0) 40 5 30shelled 30 10 10 8 (0) 40 5 30

Coffee unroasted 100 8 (0) 10 2 (0) 40 0 13 (11)roasted 100 15 10 8 40 0 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

preference for Africa

Overseas markets matter

One way to expand exports is to reach new geographic One way to expand exports is to reach new geographic markets with existing products… and often it has barely markets with existing products… and often it has barely scratched the surface of its potentialscratched the surface of its potential

Export Market Penetration Ratio Export Market Penetration Ratio – Compares actual number of bilateral flows with Compares actual number of bilateral flows with

potential numberpotential number– Potential markets are those that import the products Potential markets are those that import the products

exported by the country concernedexported by the country concerned– Example: Example:

Madagascar exported 705 products in 2004Madagascar exported 705 products in 2004

There were 66873 potential markets for these productsThere were 66873 potential markets for these products

The actual number of trade flows was 2450The actual number of trade flows was 2450

Hence the export market penetration ratio was 3.7%Hence the export market penetration ratio was 3.7%

For Taiwan the ratio was 32.8%, for S. Africa 16.7%For Taiwan the ratio was 32.8%, for S. Africa 16.7%


Enormous potential for developing countries to reach new Enormous potential for developing countries to reach new geographic markets with existing products…geographic markets with existing products…

Export Market Penetration 1985 to 2005: Kenya and Korea

0

5

10

15

20

25

30

35

40

45

Ind

ex o

f E

xp

ort

Mark

et

Pen

etr

ati

on

Korea

Kenya


Exports of Albania in 2004

0

2

4

6

8

10

12

14

16

0 10 20 30 40 50 60 70 80 90 100

Number of Export Markets

Log o

f V

alu

e o

f E

xport

s o

f P

roduct

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


Exports by Romania of Products Exported by Albania in 2004

0

2

4

6

8

10

12

14

16

0 10 20 30 40 50 60 70 80 90 100

Number of Markets

Log o

f V

alu

e o

f E

xport

s b

y P

roduct

…while Romania reaches more markets for the products exported by Albania


Sources of DataSources of Data

Foreign Market Access (foreign tariffs)Foreign Market Access (foreign tariffs)– WITS (UNCTAD and WTO data)WITS (UNCTAD and WTO data)– Global Monitoring Report (Market Access Global Monitoring Report (Market Access

OTRI)OTRI)– ITC MacMapITC MacMap– WTIWTI

Foreign Market PenetrationForeign Market Penetration– Compute using UN Comtrade data WITSCompute using UN Comtrade data WITS


Tax and labour policiesTax and labour policiesInvestment incentivesInvestment incentives may may – favor large firms over smallfavor large firms over small– favor investment in capital over laborfavor investment in capital over labor– may cost a lot for marginal additional investment may cost a lot for marginal additional investment

Restrictions on Restrictions on foreign investmentforeign investment – minimum capital – minimum capital requirements, high fees for work permits, discretionary approval requirements, high fees for work permits, discretionary approval process canprocess can – discourage investment in small enterprisediscourage investment in small enterprise– discourage investment in services discourage investment in services – and limits transfers of technology and know-how as well as access to foreign and limits transfers of technology and know-how as well as access to foreign

markets and production chains…markets and production chains…

Labour market flexibility is important to allow resources Labour market flexibility is important to allow resources to move to more efficient firms and sectorsto move to more efficient firms and sectors– adjustment costs lower where labour markets more flexible adjustment costs lower where labour markets more flexible

(Bacchetta and Janson)(Bacchetta and Janson)

Source: World Bank staff and Sosa (2006)

Marginal Effective Tax Rates on Capital Marginal Effective Tax Rates on Capital

-40

-30

-20

-10

0

10

20

30

40

50C

an

ad

a

U.S

.

Germ

an

y

Italy

Ru

ssia

Jap

an

Fra

nce

New

Zeala

nd

Sp

ain

No

rway

Neth

erl

an

ds

Au

str

ali

a

Fin

lan

d

U.K

.

Mexic

o

Irela

nd

Sw

ed

en

An

tig

ua

Do

min

ica

Gre

nad

a

St

Lu

cia

Mau

riti

us

Corporate tax policy makes capital cheaper than labor and Corporate tax policy makes capital cheaper than labor and renders incentives powerlessrenders incentives powerless

Incentives: taxesIncentives: taxes

-22%

-3%

-42%

-34%

-45%

-20%

-16%

-2%

-50%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%Manufacturing Agriculture Tourism Services

Source: World Bank

Tax policy makes capital cheaper than labor and renders Tax policy makes capital cheaper than labor and renders incentives powerless… with no apparent rationaleincentives powerless… with no apparent rationale

METR without METR without incentivesincentives

METR with METR with incentivesincentives


Sources of DataSources of Data

Marginal Effective Tax RateMarginal Effective Tax Rate– FIAS (Rich Stern)FIAS (Rich Stern)

Investment IncentivesInvestment Incentives– Government authoritiesGovernment authorities– FIAS reportsFIAS reports

FDI stocks and flowsFDI stocks and flows– ITC Investment MapITC Investment Map


ToolsTools

TRISTTRIST– Use trade and revenue (and production?) data Use trade and revenue (and production?) data

collected by government to evaluate tax and tariff collected by government to evaluate tax and tariff reformsreforms

MARTASIMMARTASIM– More sophisticated with computation of effective rates More sophisticated with computation of effective rates

of protection of protection

WITSWITS– Retrieve and analyze data on trade flowsRetrieve and analyze data on trade flows– Retrieve and analyze tariff schedulesRetrieve and analyze tariff schedules

TRIST TRIST

TRIST:A single Excel file containing all data,

tariff reform definitions and a simple partialequilibrium model

of importing

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

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: TRISTTools: TRIST

What TRIST offersWhat TRIST offers Results based on ACTUAL import and revenue dataResults based on ACTUAL import and revenue data

-> Use applied tariff rates so we can take into account tariff exemptions at product and-> Use applied tariff rates so we can take into account tariff exemptions at product and partner level and easily account for non-ad valorem tariffspartner level and easily account for non-ad valorem tariffs

Answers a range of policy relevant questionsAnswers a range of policy relevant questions -> include VAT and excise tax losses to calculate total fiscal impact -> include VAT and excise tax losses to calculate total fiscal impact -> report results at tariff line level for each trading partner-> report results at tariff line level for each trading partner-> reports changes in imports and protection (and domestic output and employment -> reports changes in imports and protection (and domestic output and employment

subject to data availability) at sector level (eg. to identify sensitive sectors)subject to data availability) at sector level (eg. to identify sensitive sectors)

Is flexible enough to respond to changes in trade policy Is flexible enough to respond to changes in trade policy scenarios and required analysisscenarios and required analysis

-> Any trade policy scenario can be incorporated and results are available immediately-> 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 -> extensions can be added to respond to ad-hoc questions: Eg. Protection at GTAP level

(Nigeria)(Nigeria)

Is transparent and allows for the incorporation of local Is transparent and allows for the incorporation of local knowledgeknowledge

-> TRIST is set up in excel, all formulas and steps taken are visible for user-> TRIST is set up in excel, all formulas and steps taken are visible for user-> flexibility to incorporate local knowledge (eg. elasticities)-> flexibility to incorporate local knowledge (eg. elasticities)-> Simple and intuitive modeling and assumptions -> Simple and intuitive modeling and assumptions -> Allows for ongoing stake holder dialogue to improve according to clients’ needs-> Allows for ongoing stake holder dialogue to improve according to clients’ needs


WITS / SMARTWITS / SMART TRISTTRIST

Data sourceData source UNCTAD TRAINSUNCTAD TRAINS National customs authorities National customs authorities (collection can be cumbersome)(collection can be cumbersome)

Tariff revenue Tariff revenue datadata

Calculated as tariff rate x Calculated as tariff rate x import value -> no exemptions import value -> no exemptions taken into account, problem taken into account, problem with non-ad valorem tariffswith non-ad valorem tariffs

As collected by customsAs collected by customs

VAT and excise VAT and excise revenue revenue

NoNo As collected by customsAs collected by customs

SoftwareSoftware WITS browser -> installation WITS browser -> installation and access to server is and access to server is requiredrequired

Excel spreadsheet, all formulas can Excel spreadsheet, all formulas can be viewed and modified by userbe viewed and modified by user

Domestic Domestic ProductionProduction

NoNo Domestic output data by sector, Domestic output data by sector, assuming constant ratio between assuming constant ratio between imports and domestic production for imports and domestic production for products within the same sectorproducts within the same sector

CoverageCoverage WorldWorld Country-specificCountry-specific

ResultsResults Imports, welfare, tariff revenue Imports, welfare, tariff revenue by HS6 (sometimes HS8) digit by HS6 (sometimes HS8) digit product and partnerproduct and partner

Imports and tariff, excise and VAT Imports and tariff, excise and VAT revenue at tariff line level and by revenue at tariff line level and by partner, output and employmentpartner, output and employment


export competitiveness: the incentive framework

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