Investigating the effects of import tariffs changes on domestic industry protection, goods prices and consumers: the case of Zimbabwe (1996-2014)
Date
2020
Authors
Mugocha, Everisto
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Abstract
The effects of import tariffs on domestic industry protection, domestic goods prices and consumer welfare are relatively under-researched in sub-Saharan African countries. This study fills the void by investigating the Zimbabwean case over the period 1996-2014. This period is interesting as the Zimbabwean economy underwent three unique economic phases. Between1996 and 1999,the economy was stable, followed by an economic crisis of 2000-2008, and an economic stabilisation period of 2009-2014. The latter period was characterised by a fiscal cash budget and a multiple currency economic system. This meant the country had lost control over its monetary and exchange rate policies. It also incurred fiscal problems as government revenue was mainly restricted to internal sources. Moreover, due to the preceding economic crisis, the country’s industrial capacity had dwindled such that most consumer goods were imported from neighbouring countries. Consequently, this study investigates whether the associated import tariffs partly contributed to high goods prices, and compromised trade protection of manufacturing industries as well as household welfare in Zimbabwe. Associated results are important for informing the country’s socio-economic development process, in addition to providing lessons to countries that have high chances of adopting both a cash budget and a multiple currency economic systemin future. While chapter 1 provides a broad introduction of the study, Chapter two analyses domestic industry protection in Zimbabwe’s manufacturing industries in the case of import tariffs, over the period 1996-2014. Temporary protection of domestic ‘infant’ industries which cannot effectively compete with ‘mature’ foreign industries has been ranked as one of the crucial drivers of industrialisation. However, no study, to the best on our knowledge, has ever analysed the domestic industry protection for a country using a cash budget and a multiple currency economic system. The main research problem is the fall in industrial capacity over the period when the country was using the cash budget and the multiple currency economic system. There is a high chance of a connection between the above policies and the dropping industrial capacity working through the trade policy, particularly the import tariffs changes. Hence, this chapter investigates whether Zimbabwe’s import tariff policy shifts over time affected domestic industry protection, with consequences on employment and local production. The analysis utilises scheduled import tariff rates from the Zimbabwe Revenue Authority, and data from Eora input-output tables and the World Integrated Trade Solution. Calculated Effective Rates of Protection over time are used as a method to track the trends of industrial protection. Results showed that domestic industry protection was on the decrease from 1996 to 2014. Instead of protecting domestic industries during the multiple currency period (2009-2014), the Government of Zimbabwe opted to tax most of these industries. The government tended to have been charging higher import tariffs on intermediate inputs when compared to finished products. Furthermore, an analysis of the Effective Rates of Protection components shows that import tariffs on intermediate-inputs are the dominant factor relative to tariffs on finished products and the input-output coefficient. Thus, the Government of Zimbabwe is recommended to focus more on reducing tariffs for intermediate-inputs to address the distortionary effects of trade policy on local industrial development. Following the negative effect of import tariffs on domestic industry protection, chapter 3 proceeds to investigate the import tariffs pass-through effect on domestic goods prices, over the period 2009-2014.The study of import tariffs pass-through has been observed to be crucial for policymaking, for instance, this may inflate some goods’ prices which hurts individual welfare. However, the problem is that extant literature has largely ignored the possibility of spatial dependence of domestic goods prices which potentially brew imprecise estimates of the pass-through effect. This study goes beyond existing studies to account for domestic goods’ price distribution across Zimbabwean districts in estimates of the import tariff pass-through effect. The analysis relies on a panel dataset of consumer goods for Zimbabwe and adopted some spatial regression methodology and descriptive techniques. To the best of our knowledge, this is the first study which estimates the import tariffs pass-through whilst accounting for spatial price distribution. Results show a positive spatial dependence on domestic goods prices in Zimbabwe’s districts. The import tariff pass-through effect is also shown to be overestimated in models that do not account for domestic spatial price dependence. Thus, the study recommends for spatial rather than non-spatial models when estimating the import tariff pass-through effect, for more precise estimates. More importantly, the study finds that a positive and significant portion of import tariffs is passed on to domestic goods prices. Thus, there is a need for policy to be cautious of the import tariffs increase concerning national inflation and poverty targets. After establishing the import tariff pass-through effect in chapter 3, chapter 4 goes on to estimate the benefit incidence of import tariffs in Zimbabwe over the period 2009-2014. The research problem here is the growing inequality between urban and rural households and also between male and female-headed households. The analysis relies on import tariffs data from the Zimbabwe Revenue Authority and FinScope’s Income and Expenditure Surveys. The incidence of import tariffs and expenditure shares are compared using Lorenz curve estimations; over time, between male and female-headed households, rural and urban households, and household income groups. The findings indicate that the import tariffs were regressive over the given period, especially in rural areas. Poor households bear much of the import tariff burden when compared to non-poor households. Female-headed households also have a higher import tariff burden compared to male-headed households. These results suggest the need for inequality reducing trade policy reforms. Importantly, designing import tariff structures that cushion poor households from the negative import tariffs effect is important for Zimbabwe. Reducing tariffs of goods largely consumed by poor households will significantly mitigate them from the negative welfare effects of import tariffs changes
Description
A thesis submitted to the School of Economics and Finance, Faculty of Commerce Law and Management, University of the Witwatersrand, Johannesburg, in fulfilment of the requirements for the degree of Doctor of Philosophy in Economics, 2020