Article

Protection in Sub-Saharan Africa Hinders Exports

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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High rates of protection hurt the export performance of many African nations, including the poorest

Dean DeRosa

Sub-Saharan African nations face major obstacles as they tackle their extensive economic problems: loss of international competitiveness, low productivity, and mounting external debt, among others. While not all of their problems are of their own creation, one is definitely so. Recent research shows that protection of domestic economies and products against international competition is responsible for major economic losses for most countries in the region.

Structural adjustment programs supported by multilateral agencies, such as the IMF and the World Bank, have emphasized, among other things, the need for countries to open their economies. This can be done by adopting more flexible exchange rate policies, liberalizing exchange and trade regimes, and allowing domestic relative prices to adjust to levels close to those in the world markets. If they follow this course, it is argued, many African countries—including the poorest countries in Africa—could restore international competitiveness, increase the productivity of their investments, and enjoy a higher level of economic growth, led in particular by a more robust export sector.

In opting for protection and against a more outward-oriented development strategy, African countries frequently cite weak world market conditions for primary commodities traditionally exported by African countries and heightened protectionism in many industrial countries. Liberalization of imports, on the other hand, is seen by these countries as producing trade imbalances, making their external payments positions more precarious.

While plausible on the surface, this position is not borne out by an examination of the evidence. The commodity terms of trade of Sub-Saharan exports did fall substantially in the 1980s, but so did the terms of trade of other regions, including East and Southeast Asia. Yet, the other regions showed higher rates of real growth of exports and output. Sub-Saharan Africa has also had more favorable access to industrial country markets than exports from other developing regions, mainly because primary commodities from the region face low tariff rates and quantitative restrictions, and such exports are frequently eligible for preferential treatment under the import duty schemes of most industrial countries.

If Sub-Saharan countries had opted for open economic policies, they would have unleashed a strong supply-side response from domestic producers. Specifically, to balance increases in imports under more liberal trade arrangements, the real exchange rate would have adjusted—typically, to a depreciated level, increasing the profitability of exports and so increasing export revenues without the need for special programs or incentive policies to promote exports.

This article presents an overview of the extent and structure of nominal protection in a large sample of Sub-Saharan countries. It also analyzes the effects of this protection on the real exchange rate and level of exports of these countries.

The information on protection presented here is based on the Trade Information System (TIS) of the UN Conference on Trade and Development (UNCTAD). The TIS is an inventory of import control measures in developing countries established to support negotiations to expand South-South trade on a preferential basis. It classifies restrictive import measures as tariffs, “para-tariffs” (other fiscal charges applied to imports), and nontariff barriers—principally, various forms of quantitative restrictions, foreign exchange restrictions, minimum price systems, and state trading monopolies. Tariffs and para-tariffs are measured in familiar ad valorem terms. Nontariff barriers, on the other hand, are measured in terms of frequency ratios, that is, the percentage of tariff-line items within an aggregate trade category that are affected by a given import regulation. The inventory includes information on the import restrictions of 23 Sub-Saharan countries (see footnote to Table 1), which together accounted for nearly 60 percent of the region’s recorded trade in 1987, the most recent year for which published TIS data are available. (Since 1987, several Sub-Saharan countries, including Ghana, Tanzania, and Uganda, have begun to undertake important structural reforms, including changes in their trade policies and

The detailed study on which this article is based is available from the author. An earlier article considers the related issue of the trade effects of simultaneous exchange rate adjustments by Sub-Saharan African countries; see “Will Contemporaneous Devaluations Hurt Exports from Sub-Saharan Africa?” by Joshua Greene and Dean DeRosa in Finance & Development, March 1991.

practices. The UNCTAD information presented, however, still describes essential aspects of the trade regimes of most of the sample countries.)

Extent of protection

The low-income Sub-Saharan countries enforce the highest rates of protection, with a high frequency of nontariff measures (see Table 1). Because of widespread discretionary licensing of imports and restrictive foreign exchange controls, the average frequency of nontariff barriers is over 90 percent in the lowest-income countries (below $300 per capita income) and over 75 percent in the upper low-income countries (between $300 and $500 per capita income). By comparison, the frequency of these barriers is substantially lower, at about 50 percent—but still very high—in the middle-income countries (per capita income above $500).

Both tariff protection and the frequency of foreign exchange controls are somewhat higher in the upper low-income countries than the other sample countries. Whereas the middle- and lowest-income countries enforce average rates of tariff and total fiscal charges (including para-tariffs) in the range of 20-30 percent, the average rate of import duties in the upper low-income countries is about 40 percent. The average for the upper low-income countries results mainly from the high rates of import duties in the two most populous countries in the group—Kenya and Sudan. The three groups of countries exhibit a similar pattern of foreign exchange controls.

Table 1.Import restrictions in Sub-Saharan countries, 1987
Frequency of nontariff barriers (NTBs)1
Tariff and other chargesForeignState
MeanTotalAllQuantitative restrictionsexchangetrading
tariffcharges 2NTBsLicensesQuotasProhibitionsrestrictions 3monopolies
(In percent)4
Low-in come countries30348951334014
Lowest income24299564023921
Upper low-income414377289643
Middle-income countries223048291118
All countries29338147333614
Sources: UNCTAD Secretarial, Handbook ot Trade Control Measures of Developing Countries, 1997. and Handbook Supplement 1997 (Geneva: UN Conference on Trade and Development. 1998).… Indicates that statistics are not computableThe low-income countries in the sample were: Lowest income: Burkina Faso, Burundi, Guinea. Madagascar. Malawi, Mozambique. Tanzania. Uganda. Zaire, and Zambia. Upper low-income- Benin, Central African Republic. Ghana, Kenya. Sierra Leone, Somalia, and Sudan The middle-income countries were: Angola, Cameroon. Congo. Côte d’lvoire, Senegal, and Zimbabwe.

Percentage of tariff lines affected by NTBs, excluding restrictions on imports of alcohol and tobacco

Customs duties plus customs surcharges and surtaxes, stamp taxes, certain other fiscal charges, and tax on foreign exchange transactions.

Advance import deposits, multiple exchange rates, and licensing or other restrictions on the acquisition and use of foreign exchange

Statistics by country are simple averages of rates of protections across trade categories. Averages for country groups are computed using 1987 population levels as weights.

Sources: UNCTAD Secretarial, Handbook ot Trade Control Measures of Developing Countries, 1997. and Handbook Supplement 1997 (Geneva: UN Conference on Trade and Development. 1998).… Indicates that statistics are not computableThe low-income countries in the sample were: Lowest income: Burkina Faso, Burundi, Guinea. Madagascar. Malawi, Mozambique. Tanzania. Uganda. Zaire, and Zambia. Upper low-income- Benin, Central African Republic. Ghana, Kenya. Sierra Leone, Somalia, and Sudan The middle-income countries were: Angola, Cameroon. Congo. Côte d’lvoire, Senegal, and Zimbabwe.

Percentage of tariff lines affected by NTBs, excluding restrictions on imports of alcohol and tobacco

Customs duties plus customs surcharges and surtaxes, stamp taxes, certain other fiscal charges, and tax on foreign exchange transactions.

Advance import deposits, multiple exchange rates, and licensing or other restrictions on the acquisition and use of foreign exchange

Statistics by country are simple averages of rates of protections across trade categories. Averages for country groups are computed using 1987 population levels as weights.

Discretionary import licensing is by far the most widely applied quantitative restriction. Some countries, however, rely heavily on the use of quotas (Kenya) and prohibitions (Madagascar). Other frequently employed nontariff barriers include minimum price systems and state trading monopolies. Middle-income countries frequently administer prices of imports. All the sample Sub-Saharan countries had state trading monopolies. Except in Angola, Mozambique, and Tanzania, where state monopolies controlled a high proportion of imports in 1987, minimum price systems and state trading are much less frequent than either quantitative restrictions or foreign exchange controls in most countries.

Detailed data underlying the summary presented in Table 1 reveal a fairly common pattern of nominal protection in the 23 sample countries for broad categories of primary commodities and manufactures. Foremost, they reveal that the Sub-Saharan countries maintain escalating rates of tariff and other forms of protection against increasingly labor-intensive goods. In addition, for food security reasons, these countries apply high rates of protection against food imports, especially cereals such as maize, rice, and wheat. Finally, among other items, imports of labor-intensive apparel and other textile products are frequently controlled, especially through minimum import prices and the operations of state trading monopolies. Given that the Sub-Saharan countries themselves are predominantly low-wage economies, the emphasis on restricting labor-intensive imports is somewhat incongruous. An explanation may be that organized labor in the modern sector of these countries (the sector that competes with imports) enjoys a wage rate higher than competitive levels. This, in turn, may encourage adoption of more capital-intensive technologies than otherwise and reduce competitiveness except behind high tariff walls and other forms of protection.

Protection and export performance

The levels of protection in Sub-Saharan countries are substantially higher than in most other developing countries. Such discrimination against foreign goods reduces the scope for greater economic efficiency and welfare and hinders the region’s exports.

There is a close relationship between protection, the real exchange rate, and the level of a country’s exports. Essentially, restrictions on imports impose a tax on exports. When a country restricts its imports, the import-competing sector increases its use of domestic resources in order to expand output to meet a larger share of local demand for traded goods. This causes the cost of domestic resources to rise, making exports based on those resources less competitive and, as a consequence, results in an appreciation in the real exchange rate of the country. The subsequent decline in exports often will match the protection-induced fall in imports, with the result that there is no improvement in the external balance to the extent that the stance of macroeconomic policies remains the same.

In the case of trade liberalization (treated below), the same economic process works in the reverse. Lowering tariff and other barriers to imports reduces the implicit taxation of exports by reducing the extent of import substitution in the local economy, thereby lowering the cost of domestic resources and causing the real exchange rate to fall. The resulting increase in the profitability of exports ensures that exports expand sufficiently to match the increase in import demand.

Empirical model. To measure the effects of protection on the 23 Sub-Saharan countries’ exports, a simple, multicommodity model of trade and exchange rate adjustment was used. The model assumed that the international terms of trade of these countries are exogenously determined. It employed a common set of assumed values for price elasticities of import demand and export supply of five broad categories of traded goods (foods, agricultural raw materials, mineral fuels, minerals and metal ores, and manufactures) in each of the sample countries, selected on the basis of published estimates of long-run price elasticities for foreign trade by African and other countries.

The multicommodity model was used to gauge the trade and exchange rate effects of far-reaching import liberalization in each of the 23 Sub-Saharan countries under review. This liberalization was represented by the reduction of import duties to a uniform rate of 10 percent and an increase in the volume of administered imports by alternative “upper” and “lower” a priori estimates of the extent to which nontariff barriers restrict imports. Reduction of import duties to 10 percent amounts to a substantial proportional reduction of ad valorem duty rates in most sample countries. For the high-tariff, upper low-income countries, the reduction is about 70 percent, while for the remaining countries, the reduction is about 50 percent of existing duties.

The implications of nontariff barriers could not be well captured by the simple model, because these barriers take many different forms and often have indirect effects on domestic prices. In the simulation exercise, non-tariff barriers were simply regarded as restrictions imposed by national authorities to achieve quantitative limits on imports. Accordingly, as indicated by the frequency of nontariff barriers in each trade category, imports of each country that are predominantly subject to nontariff barriers were assumed to be strictly controlled, and the model assessed the effects of increasing the volume of these imports by, alternatively, an upper estimate of 25 percent and a lower estimate of 10 percent.

Results. The empirical results, which are essentially long-term in nature and do not include possible short-term costs of adjustment, indicate that import liberalization increases the value and volume of exports through the adjustment of export prices (relative to non-traded goods). After the liberalization, the price of exports (which is the inverse of the real exchange rate in the model) was estimated to be higher, on average, by about 34 percent in the upper case and about 15 percent in the lower case (see Table 2). Countries with the highest rates of tariff and nontariff protection showed the most “overvalued” real exchange rates because of protection. In the case of Somalia, the extremely overvalued exchange rate—which led to increases in the price of exports of between 140 and 56 percent after the liberalization—resulted from the country’s high frequency of nontariff barriers, combined with an especially low level of recorded official exports in relation to imports. In other countries (e.g., Guinea, Central African Republic, Cote d’lvoire, and Congo), where protection was low and recorded levels of exports relative to imports were considerably greater, the estimated effect of protection on the price of exports and the real exchange rate was relatively modest—as low as about 5 percent.

Table 2.Estimated effects on exports of import liberalization by Sub-Saharan African countries
Upper estimates1Lower estimates2
Volume
Relative

price2
Primary

commodities
ManufacturesAll

goods
Change in

value
Relative

price3
Primary

commodities
ManufacturesAll

goods
Change in

value
(In percent)(In millions

of US dollars)4
(In percent)(In millions

of US dollars)4
Low-income countries38.534.557.837.31,670.016.715.025.016.2735.7
Lowest income37.532.656.336.1976.115.813,923.815.3396.2
Upper low-income40.337.960.439.5693.618.217.127.317.8339.5
Middle-income countries15.110.722.611.7984.98.86.513.27.0566.5
All countries34.130.051.132.52.654.815.213.422.814.51,304.2
Source: Comparative static analysis using the multi-commodity model for each country, using 1985 trade flows. 1967 import duties, and NTB frequency ratios, and assuming constant international terms of trade. Primary sources of data are UNCTAD Secretariat, Handbook of Trade Control Measures of Developing Countries and Handbook Supplement, 1987 (Geneva. UN Conference on Trade and Developmental. 1988); and World Bank. Trade Analysis and Reporting System (based on UN Series D Commodity Trade Tapes).

Assuming import duties are reduced to 10 percent and administered imports are increased by 25 percent.

Assuming import duties are reduced to 10 percent and administered imports are increased by 10 percent.

Price of exports relative to nontraded goods.

Additional export value per annum, measured in 1985 dollars.

Source: Comparative static analysis using the multi-commodity model for each country, using 1985 trade flows. 1967 import duties, and NTB frequency ratios, and assuming constant international terms of trade. Primary sources of data are UNCTAD Secretariat, Handbook of Trade Control Measures of Developing Countries and Handbook Supplement, 1987 (Geneva. UN Conference on Trade and Developmental. 1988); and World Bank. Trade Analysis and Reporting System (based on UN Series D Commodity Trade Tapes).

Assuming import duties are reduced to 10 percent and administered imports are increased by 25 percent.

Assuming import duties are reduced to 10 percent and administered imports are increased by 10 percent.

Price of exports relative to nontraded goods.

Additional export value per annum, measured in 1985 dollars.

On export performance, the empirical results suggest that protection in the sample countries reduced the combined annual exports of the 23 Sub-Saharan countries by between about 3.5 percent and 2 percent of gross domestic output (GDP) each year, or between $2.7 billion and $1.3 billion a year in 1985 dollars. These estimates represent the loss of export revenues by the sample countries, on average, by between about 32 and 15 percent annually. Because of their higher rates of protection, the low-income countries “lost” the most potential export revenue, between about 37 and 16 percent on average. The other countries also experienced appreciable losses of potential exports—between about 12 and 7 percent of their total exports on average, as a result of protection.

Disaggregated by commodity categories, the results indicate that producers of primary commodities suffered the largest losses in export earnings because of the restrictive trade regimes in their own countries. Notably, they also suggest that protection appreciably inhibits the expansion of nontraditional exports. To the extent that export supply elasticities are higher for manufactures than primary commodities in Sub-Saharan countries (that is, exporters can quickly produce more manufactures to meet increased demand), the simulated import liberalization promotes greater proportional expansion of nontraditional than traditional (i.e., primary product) exports.

Finally, although the results are not summarized in Table 2, the multicommodity model estimated the impact of import liberalization on total import duties and found that the net effects on revenues would be moderate in some cases but substantial in others. Although many of the sample countries rely heavily on international trade taxes for fiscal revenues, in some countries customs regulations are poorly administered and often include special exemptions. Thus, even if Sub-Saharan countries were to dismantle import controls and reduce import duties to a uniform rate of 10 percent, and if they were simultaneously to enforce customs duties without exemptions, total duty revenues would not necessarily fall precipitously. The empirical results suggested that some low-income countries (Burundi, Kenya, Madagascar, Malawi, and Tanzania) would experience little change in their fiscal revenues under a liberal import regime. In most instances, however, the sample countries were estimated to experience significant reductions in import duty revenues (relative to GDP) of about 1-2 percentage points. To preserve the level of overall domestic savings, these losses might have to be offset by improvements in the revenue yield of other fiscal measures, where available. In any case, in all instances losses in import duties, if any, should be weighed against the expected enhancement of export performance and economic growth engendered by import liberalization.

Conclusion

The economic analysis and empirical findings summarized in this article support the view that high rates of protection in the Sub-Saharan countries are an important factor in the economic condition of these countries today and especially contribute to their poor export performance. More robust export performance and economic growth, however, cannot be regained by simply reforming trade policies, particularly to the extent that restrictive import measures reflect other political and economic rigidities. Countries must, therefore, pursue trade liberalization in association with other policy reforms. The most important areas needing reform frequently include industrialization policies that discriminate against agricultural and rural development, economic policies that inhibit financial development (including the growth of capital and foreign exchange markets), and regulatory and institutional arrangements that hinder wider investment by domestic as well as foreign private sector enterprises.

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