P R O T E C T I O N I S T P O L I C I E S A N D M A N U FA C T U R I N G T R A D E F L O W S I N A F R I C A
|
99
To test this effect, the following trade balance equation is estimated: tbijt bo 1 ln(gdp)jt 2 ln(reer)jt 3 ln(1 tar)ijt 4 ln(gdpf )ijt 5 ln(prod)ijt 6 ln(tcost)ijt 7 ln(tot)ijt ijt (6) where, in addition to the variables already explained, tb is the log ratio of the value of exports to the value of imports, and tot is the terms of trade calculated as the unit value of exports relative to imports. The trade balance is expected to improve in response to a depreciation of the real exchange rate, a rise in foreign GDP, a decline in domestic consumption (proxied by domestic GDP), an improvement in the terms of trade (tot), or a rise in productive capacity (prod). Liberalization has an ambiguous effect. Rising tariffs on inputs, measured by the variable tcost, are expected to diminish the competitiveness of exporters and domestic producers and therefore reduce import and export volumes. Tariffs on final goods reduce imports but also reduce the incentive to produce for the export market. The sign can therefore be positive or negative. Table 6 gives the results for the trade balance using mirror import data. The results using own data are quantitatively similar, but fewer variables are significant. The trade balance relationship appears to be well defined, and most of the variables are significant or of the correct sign, or both. A real depreciation, for example, improves the trade balance in developing countries, including those in Africa. An exception is the terms of trade in model A, which suggests that an improvement in the terms of trade worsens the trade balance. The expected positive coefficient emerges, however, in model B. Focusing on the tariff variables for developing countries and the full sample of countries, there is some evidence that higher input tariff costs (tcost) are negatively associated with the trade balance. The estimates from model A suggest that a 10 percent reduction in tcost is associated with an improvement in tb of 4.63 percent. This relationship, however, is not robust to the inclusion of the various fixed effects and is insignificant in all estimates of model B. Similar results are found for Africa. By contrast, a positive relationship between output tariffs and the trade balance is found in both models for developing countries (and in the full sample). The preferred results from model B (column 6) suggest that a 10 percent increase in protection measured by (1 tar) is associated with an increase in the value of exports relative to the value of imports in developing countries of close to 7 percent. The average decline in (1 tar) during the period 1993–2004 for developing countries is 8 percent, implying that liberalization will have reduced the value of exports relative to imports for the average developing country by approximately 5 percent. This relationship, however, does not hold for African economies, as is shown by the insignificant coefficient for output tariffs in the African sample (column 8), as well as by the offsetting negative coefficient on the interaction term in column 7. Overall, the results for developing countries are broadly consistent with those of Santos-Paulino and Thirlwall (2004), who find that tariff liberalization may have a negative impact on the trade balance. There are, nevertheless, some important differences. First, there is evidence that liberalization enhances export performance through lower input costs. Second, the effect on the trade balance is less than is suggested by