Globalization and Markets

Domestic Reforms and Side Policies

It has often been demonstrated that trade liberalization needs domestic reforms and side policies to be fully efficient in order to promote growth and development. In particular trade liberalization has contrasting effects on domestic agents whether they are skilled or unskilled, they work in sector competing imports or in exporting sectors. Therefore trade liberalization could need fiscal policies and transfers to accompany the negative impact of this process on domestic agents’ real income.

Another frequent concern is the potential impact of trade liberalization on the potential loss of fiscal revenues. Between 2001 and 2003, the trade tax revenues comprised 22 percent of total government revenues in low-income countries. Therefore the effect of trade protection on tax evasion is of considerable policy interest in low-income countries.

Trade Protection and Tax Evasion

This project examines the effect of tariff policies on tax evasion using the case of Kenya, Mauritius, and Nigeria. The analysis was motivated by the relative ordering of these three African countries in terms of their perceived institutional quality and the fact that in these countries tariff revenues constitute a very important component of the government budget. The methodological contribution of this project has been to better identify the effect of tariffs on evasion using the variations in trade protection measures across three dimensions (time, product and trading partner).

Here, we employ a much-improved trade protection data (MacMAP 2001 and 2004) relative to the existing studies. This data set provides extended measures of protection. The MAcMAP (2001 and 2004) database on trade protection includes ad valorem equivalent (AVE) of specific tariffs, AVE of tariff rate quotas, and AVE of antidumping duties apart from ad valorem tariffs. Further, the data set also captures country-specific trade protection by accounting for all regional agreements and preferential schemes.

Fiscal evasion is postulated to be a function of level of applied tariffs. We exploit variation across three dimensions: across product, across time, and across trading partners.

Our results indicate that in these three African countries, the evasion elasticity is significant.

Moreover, the evasion elasticity is much higher in Nigeria, followed by Kenya and then Mauritius. The difference between the three cases is preserved when comparing the same set of products and trading partners. In this case the evasion elasticity differences are likely to be a function of enforcement quality.

This relative ordering of the estimated evasion elasticity in fact matches the ordering in different indexes of perceived institutional quality (e.g., as provided by Transparency International).

Table: Econometric assessment of the elasticity of fiscal evasion at the border to applied tariff

  Kenya Mauritius Nigeria
Applied tariff 0.891*** 0.380*** 1.989***

Note: results significant at 1%
Comments: The elasticity of fiscal evasion at the border to the applied tariff is positive and significant and greater in countries which are supposedly more corrupted (Kenya and Nigeria).

The Productive Safety Net Program (PSNP) and Cereal Market Dynamics in Ethiopia

In Ethiopia, all major cereals are non-tradable, prices are highly volatile, and the needs for food-based interventions programs are frequent. Monthly cereal price variability in the country is not only among the highest in the world, but has even worsened since 2000. Both import and local procurement of food aid in the country are substantial and their effects are hotly debated. Amid these realities, the country launched one of the largest social safety net programs in Africa in January 2005, called Productive Safety Net Programs (PSNP), which combines both food and cash transfers to the beneficiaries.

The Introduction of the PSNP was a strategic move on the part of the Ethiopian government towards reducing food aid dependence, boosting domestic production, and fostering market development. The country’s food aid imports did in fact declined from 861 thousand tons in 2004-05 to 377 thousand tons in 2005-06 and 447 thousand tons in 2006-2007. Meanwhile, official estimates of production of the four major cereals (teff, wheat, maize and sorghum) showed a 40 percent increase from 8.3 million tons in 2004-05 to 11.7 million tons in 2006-07. Yet, prices of major grains started increasing sharply since late 2005. This project was designed to address the following questions:

  • How different are the cereal price dynamics in PSNP woreda compared to the woredas outside of the program?
  • Have prices in PSNP woredas increased faster than the non-PSNP woredas?
  • How well have the values of cash transfers per household changed relative to the value of food transfers?
  • Will scaling up PSNP fuel further cereal price inflation?

Other related projects: Impacts of cash vs food transfer on local grain markets, changes in the structure of grain markets in remote food insecrure areas, Agricultural commodity competitiveness analyses, African Agricultural Market