Chapter

11 Are Export Duties Optimal in Developing Countries? Some Supply-Side Considerations

Author(s):
Ved Gandhi, Liam Ebrill, Parthasarathi Shome, Luis Manas Anton, Jitendra Modi, Fernando Sanchez-Ugarte, and George Mackenzie
Published Date:
June 1987
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Author(s)
Fernando Sanchez-Ugarte and Jitendra R. Modi 

Export duties play an important role in the revenue structures of developing countries. For these countries, export duties are a useful tool for raising revenue, since compared with their enormous financing needs for social and economic development they generally have few tax bases at their disposal and also are hampered by their limited capacity for tax administration. Government budgets in a number of developing countries rely rather heavily on export duties, accounting for more than 1 percent of gross domestic product (GDP) and, with some minor exceptions, exceeding 10 percent of total tax revenue.1 In most cases, export tax receipts are derived from high rates of taxes on one or two commodities that feature prominently in the exports of these countries. Frequently, export duties in developing countries are levied in lieu of income taxes on exporters and are justified on grounds of the ease of tax administration. They are also generally made progressive with respect to export prices, and thereby incomes earned by exporters; this is justified on grounds of equity and needs for macroeconomic stabilization. Furthermore, exports from developing countries are frequently subject to implicit export duties in the form of overvalued or multiple exchange rates, producer price ceilings, and quantitative restrictions on exports. These implicit export duties probably lead to a reduction in the level of exports even though they often do not yield fiscal revenue.

Supply-side economists stress the negative effects of high and progressive taxes on the incentives to work, save, and invest.2 Their argument, however, specifically relates to income taxes and not export duties, which are frequently levied in developing countries in lieu of income tax on exporters. Because export duties can have important effects on producer incentives, significant supply-side effects can occur.3 A straightforward application of supply-side economics to export taxation would call for the reduction of high export duties existing in many developing countries to create incentives to produce and export and to generate private incomes and increase employment. In fact, from the point of view of world economic efficiency, the first-best policy would be to remove all restrictions on world trade and even remove rather than reduce export duties. Hence, the supply-side prescription of lowering or even eliminating export duties would go hand-in-hand with the economic efficiency criterion for the use of world resources.

A country might argue that there is some justification for the levy of export duties under certain circumstances. First, it might possess market power in a certain commodity market and be tempted to increase its economic well-being at the expense of the welfare of the importing countries by imposing an export duty. Second, a tax on exports can be levied to absorb windfall profits, if any, and as long as it does not affect economic behavior it could be nondistortionary. However, as this paper shows, to meet this objective, the tax has to be “unexpected” by the economic agents. Finally, export taxes can also be levied to stabilize producer incomes over time and, under certain conditions, this type of taxation can be “efficient.”

Following the argumentation underlying the first justification, the paper estimates country optimal export duties for a number of developing countries by commodity and compares them with the actual effective level of export taxes that incorporates, wherever possible, the effect of both explicit and implicit export duties. The comparison shows that for most cases the actual level of export taxation is higher than the level that can be considered even country optimal, let alone world optimal. Furthermore, given the small but significant values of the supply elasticities, the paper also shows that export taxation substantially lowers exports. Finally, the paper presents information for selected developing countries that suggests that the use of export duties to stabilize producer incomes does not necessarily reduce risk and can have a detrimental effect on the incentives to produce.

Section I of the chapter describes the rationality for export duties in developing countries. Section II develops a methodology for estimating country optimal export duties and for measuring the supply-side effects of export taxation.

In Section III, an attempt is made to illustrate (it must be stressed that it is only an illustration) the application of the methodology developed in Section II to the measurement of the supply-side effects of export taxation prevalent in many developing countries. The section also notes important qualifications that must be borne in mind when interpreting the results of this exercise. The section concludes with an analysis of the impact of country-specific commodity stabilization schemes.

Section IV sums up the major findings of the study and discusses the ways in which existing export taxes could be modified from the standpoint of supply-side objectives. The chapter concludes with an annex, which presents the levels and structure of export duties in selected developing countries.

I. The Rationale for Export Taxes

Developing countries apply export taxes for many reasons,4 among which the most important are (1) to limit exports to take advantage of the monopoly power in a certain market or to benefit from other market imperfections; (2) to raise revenue from export commodities; and (3) to stabilize producer incomes.5 This section describes these arguments and shows that export duties used in connection with (1) may increase the welfare of the country while reducing that of the rest of the world; export duties used in connection with (2) may distort economic efficiency in general; and export duties used in connection with (3) may improve a country’s economic welfare without lowering the welfare of the rest of the world.

Export Duties and Market Imperfections

The literature focuses on two kinds of market imperfections: those relating to the existence of some form of monopoly power in the commodity market (the optimal tariff argument) and those arising from protectionism on the part of consuming or importing countries and from other restrictions in commodity markets.

Monopoly Power of the Exporter

The optimal export duty argument is that a given country, or a group of countries, with monopoly power in the world market of a commodity should levy an export duty to extract monopoly profits6 and thus to obtain a net welfare gain. The export duty, however, will improve the welfare of the individual country that exerts monopoly power but not of the world as a whole. Partial equilibrium analysis shows that the level of taxation that can be considered country optimal (i.e., that will maximize the gain to an exporting country) equalizes the marginal revenue and the marginal cost of exporting the commodity as given by the inverse elasticity rule7 (Figure 1):

Figure 1.Country Optimal Export Duty

where tki is the country optimal ad valorem export duty on the f.o.b. price of the export commodity k and ηki is the country-specific long-run elasticity of demand for exports of the taxed commodity. The country in question does not have to be a “pure” monopolist in the export market for the optimal tariff argument to apply.

Protection by Importing Countries and Other Restrictions on Trade in Commodity Markets

Importing countries often protect domestic producers of particular commodities by restricting the volume of imports through import quotas or other means.8 Furthermore, producing countries have signed agreements, sometimes with the participation of major consumers, to stabilize and regulate commodity markets by means of restrictions on the level of exports by assigning export quotas to producing countries or by relying on international buffer stock arrangements.9 Such trade restrictions give rise to a dual world market price structure—the commodity price in countries that have a protected market is higher than the price in the nonrestricted market—and the producers in an exporting country have an incentive to overproduce, given a positive elasticity of supply, as long as they assign a positive probability to selling extra output in the protected market.10 The authorities of exporting countries can restrict overproduction and avoid an excessive world supply of the commodity by levying an export tax, which would efficiently achieve the desired level of production (Figure 2).

Figure 2.Export Taxation in Quota Markets

Taxes on Exports as Income Taxes

Export taxes are commonly used simply to collect revenue from export activities. Public finance literature has tended to assimilate these taxes under income or direct taxes because insofar as export taxes cannot be shifted to consumers in the international market, they obviously affect the income of domestic producers.11 The export tax can also have an “excise” effect to the extent that the decline in the export price of a commodity relative to its domestic price reduces the level of exports (Tanzi (1976)). Whether export duties should be treated as an income tax or an excise tax is still controversial.

It might be argued that the supply of the typical export of a developing country is highly price inelastic, either because its producers are not price responsive or because the commodity is produced with the help of a sector-specific factor of production whose supply is fixed. In this case, a tax on exports can be simply considered as an income tax on an immovable factor of production and hence nondistortionary.12 The assumptions underlying this conclusion can be questioned. With respect to the first point, there is ample empirical evidence that the supply of export commodities is affected by the producer price.13 With respect to the second point, it can be argued that even when an export duty is fully capitalized in the price of an immovable factor of production (say, land), it still can have undesirable “excise” or supply-side effects.14

In the long run, an export duty imposed on an activity that employs an immovable factor of production will tend to be fully capitalized in the price of this factor of production—a result which may seem to indicate that the tax is nondistortionary.15 The output of the taxed commodity, however, will tend to decrease because the export duty reduces the producer price of export goods compared with other goods and thus creates a distortion. It is the contraction in the level of output of the export good that reduces the price of the immovable factor of production. Furthermore, the export tax will create a “wedge” between the international price and the price paid by domestic consumers, creating an additional distortion. Hence, notwithstanding the fact that the export tax is fully shifted back to the immovable factor of production, the tax still can have excise effects; that is, it distorts the production and the consumption decision. To this extent, the export tax in the long run is not necessarily equivalent to a tax on the income of the immovable factor of production. In the more general case, when the export sector employs factors of production that are movable across sectors, the distortionary effects of the export tax are straightforward.

It might also be argued that over the short run, unexpected increases in the international price of an export commodity can sometimes lead to temporary “windfall” gains to exporters that can be taxed through an export duty.16,17 This tax is presumed to be nondistortionary and, some might argue, the windfall gains are “unnecessary” to induce the given level of exports. For the analysis here, the distinction should be made between systematic (expected) and unsystematic (unexpected) tax policy changes. A systematic export duty that applies when prices are above a certain “normal” level will discourage production and exports because if the market is, by and large, competitive, there will be no “excess” profits in the long run, as good years will balance out the bad ones.18 In addition, any systematic, though temporary, export tax policy with respect to windfall gains will sooner or later be incorporated by producers in their expectations, distorting their economic behavior. Only the taxation of profits, resulting from unsystematic changes, will have no effect on producers’ behavior concerning exports, although it might make smuggling more profitable.

Devaluation of the exchange rate can generate windfall profits for exporters, similar to the unexpected increase in the international price of a commodity described above; however, it will also raise the cost of imports and other costs to the exporter. Therefore, it should not be assumed automatically that after a devaluation exports must always be taxed additionally. In fact, the levy of an export tax after devaluation can hamper the achievement of an increase in exports needed to restore the balance of trade equilibrium, which was the primary reason for the devaluation.

Export Duties in Connection with Stabilization Schemes

Developing countries can also rationally use export taxes in connection with three kinds of stabilization schemes: (1) the stabilization of the international price of a commodity or group of commodities, especially in support of international commodity agreements; (2) the stabilization of foreign exchange export earnings derived from the exports of one commodity or group of commodities; and (3) the stabilization of the domestic consumer price of a traded or exportable commodity.19

The economic efficiency arguments in favor of commodity stabilization efforts are well known. It has been stated that the free market solution does not necessarily allocate resources efficiently because there are no perfect and complete futures and risk markets and there is no perfect information. Hence, market intervention is called for. The first-best solution would be to encourage the development of efficient futures and insurance markets. If this is not feasible, as a second-best solution, a commodity stabilization scheme can, under certain conditions, improve domestic economic welfare.20 Since it is reasonable to assume that economic agents generally, and exporters in particular, are risk averse, a commodity stabilization program that reduces the variability of the permanent income of exporters without reducing the mean21 will improve welfare.22 Even when the administrative costs of the stabilization scheme are taken into account, exporters could be better off as long as the cost of administration does not exceed the welfare gain from reduced riskiness. Risk averse consumers can also benefit from domestic price stabilization. Finally, from a macroeconomic point of view, the stabilization of foreign exchange earnings can also lead to welfare gains for both producers and domestic consumers. Notice, however, that an efficient export tax used to attain commodity stabilization will not yield tax revenue in net present value terms.

The commodity stabilization schemes can also conceivably have an adverse effect on the economy in two main respects, namely, the size of the levy on producers and the uses to which the proceeds of the levy are put relative to what the producer would have done with it if he had not been subject to such an impost.23 With respect to the size of the levy, the point is that a high level of export duty implicit in the stabilization levy may adversely affect the producer’s incentive to produce the commodity concerned—the actual impact being dependent on the supply elasticity. Second, with respect to the use of the levy, the adverse impact may stem from the fact that the outlays undertaken by the stabilization scheme are much less productive (in terms of additional output generated) than those which the producer would most probably have undertaken in the absence of the levy.

II. Methodology for Estimating Country Optimal Export Duties and Their Effects

This section develops a methodology derived from the optimal export duty argument for estimating the country optimal level of export taxation by commodity. Thus, optimality in this section, and throughout the remainder of the paper, is understood in this limited sense incorporating only the optimal export duty argument (see section on “Monopoly Power of the Exporter,” above). It should be recalled at this stage that the optimal export duty is only optimal from the point of view of the country that imposes it; it is not optimal from the point of view of the world as a whole. By comparing the actual level with the optimal level of export taxation estimated with the help of the methodology developed below (data on the former are given in the Annex), it is possible to indicate the distortionary effect of export taxation of a given country on the level of its exports and to measure the supply effect of export duties.

Country Optimal Export Duties

As mentioned in Section I, the country optimal export duty (tk*i) on commodity k by country i, which faces a less than perfectly elastic demand curve, is given by the inverse elasticity rule:

In equation (1), ηki is the absolute value of the country-specific long-run elasticity of demand of commodity k. Most of the demand elasticities have been estimated in the literature for commodity markets and not for individual countries. The following formula, based on partial equilibrium considerations, therefore, transforms the market elasticity of demand of a commodity into the country-specific elasticity of demand for the same commodity.24 As can be seen, the country-specific elasticity of demand is higher in absolute terms than the market demand elasticity:

where ηk is the absolute value of the long-run market elasticity of demand of commodity k, Ski is the share (in percent) of country i in world exports of commodity k, and εk0 is the long-run elasticity of supply of all other exporters of k (excluding country i) who are assumed to act independently of each other. The value of this elasticity of supply is given by

where εkj is the long-run elasticity of supply of exports of commodity k by country j. By substituting the estimated value of equations (2) and (3) into equation (1), one can calculate the country optimal export tax by commodity that, as can be seen from equation (1), will be higher the larger the share of country i in world exports of commodity A, the lower the absolute value of the market demand elasticity of commodity k, and the lower the elasticity of supply of other exporters of commodity k.25,26

Estimate of the Effect of Export Duties on Exports

The effect of export taxes on the level of exports can be estimated by assuming a constant elasticity of supply of exports. The equation below measures the change in exports of commodity k by country i that would result if the country in question adopted country optimal export taxes,27

In equation (4), Pk is the price of commodity k that would prevail if country i adopted the country optimal export duty, ΔPk is the change in price that would result, and tki is the actual export duty applied by country i.

An estimate of the effect of export taxes on the market price (ΔPk/Pk) can be obtained, likewise, assuming a constant price elasticity of demand function for exports. Namely,

where (ΔXk/Xk)d measures the change in the market demand of world exports of commodity k that would result from country i adopting country optimal export taxes. Combining equations (4) and (5), using the market-clearing condition that the total change in supply of exports equals the sum of the changes in each exporting country:

and solving for ΔPk/Pk gives the effect of the export duties oil the international price of the commodity:

The effect of export taxes on the level of exports of commodity k by country i can then be estimated by substituting equation (7) into equation (4). The effect on foreign exchange earnings is estimated by adding equations (7) and (4).

Equation (7) is derived under the assumption that other exporting countries do not react to the tax change introduced by country i. This assumption, which could be reasonable in the case of small countries, is not likely to hold when the country that changes its tax policy is an important exporter. That is because other affected exporters would tend to react so as to maintain their relative market shares by simultaneously adjusting their present levels of export taxation. One can, of course, attempt to formulate a complex behavioral model to incorporate the impact of simultaneous reactions of the numerous exporting countries. The available data, however, which permit analysis of the impact of changes in the existing tax rates but only on an illustrative basis, do not facilitate the more complex assessment involving alternative interdependent behavioral and closure rules. The scope of the analysis in this paper, therefore, has been restricted to a situation in which all other countries keep their present tax levels unchanged; it nonetheless takes into account the impact of the adoption of the optimal tax by any one country i on the market shares of all major exporters of the taxed commodity.

The methodology developed above can be generalized further by including the effect that the export duty would have on the price of substitutes and complements in both demand and production. However, this adjustment has also not been made in the empirical application of the methodology that follows, since it is assumed for the purpose of the illustration that the prices of all other commodities remain constant. Furthermore, it should be stressed that the methodology derived here assumes that there are no other relevant distortions, whether in this market or in other markets, that are introduced by the imposition of the export duty.28

III. Appraisal of the Impact of Existing Export Taxes

This section evaluates the impact of existing export taxes on the supply of commodity exports and foreign exchange earnings for a group of selected developing countries within the analytical framework and methodology formulated in the preceding section. In doing this, the paper uses the readily available estimates of demand and supply elasticities without making any judgment on their reliability. Were these estimates to be accepted, the main conclusion of the exercise would be that the observed level of export taxation applied by the majority of developing countries exceeds the country optimal level. Hence, export taxes as currently applied are in most cases distortionary and thereby discourage exports.

Estimation of Country Optimal Export Taxes

Most of the export tax revenue in developing countries is derived from a select group of commodities that have relatively inelastic demand and supply elasticities (Table 1). Furthermore, for some of these commodities, a small number of developing countries seem to have a large share of the world market. This suggests that the country optimal export taxation of these commodities could be different from zero, at least for such countries.

Table 1 shows ranges of long-run supply elasticities estimated according to the methodology developed by Nerlove (Askari and Cummings (1977)) and demand elasticities for a group of selected commodities by country given in Valles (1968), Labys and Hunkeler (1974), Adams and Behrman (1976), Askari and Cummings (1977), and Baldwin (1983) (see footnotes in Table 1 for details). The supply elasticities are, in all cases, positive and different from zero, indicating that suppliers do respond to price incentives. The demand elasticities are in all cases negative, as expected, and generally larger than minus one. The exports of the selected commodities are also concentrated in a handful of developing countries.

Table 1.Estimates of Country Optimal Export Duties for Selected Commodities(In percent)
Supply Elasticity

for the
Share in

World Market
Actual Export

Duty Rate
Estimated Country

Optimal Export

Duty Rate
Country

(1)
1979-81

(2)
1979-81

(3)
High

(4)
Low

(5)
Coffee
Demand elasticity1
(-0.2, -0.6)
Supply elasticity
for others1 (0.3)
Brazil0.6217.9059.00347.5730.85
Burundi0.640.7021.0031.550.89
Colombia0.6517.6013.00337.5920.47
Costa Rica0.562.5010.0034.912.82
Côte d’Ivoire0.345.8064.00718.1411.14
El Salvador0.565.2047.00714.618.71
Ethiopia0.642.4037.0036.413.77
Guatemala0.563.5024.0037.594.38
Haiti0.560.5025.0031.100.63
Honduras0.561.5032.0073.562.06
Rwanda0.640.6035.0031.340.77
Sierra Leone0.640.2034.0030.530.61
Tanzania0.641.3041.0073.882.28
Uganda0.642.7028.0036.313.67
Togo0.310.2077.0074.823.58
Total62.60
Cocoa
Demand clasticily1
(-0.3, -0.4)
Supply elasticity
for others1 (0.3)
Côte d’Ivoire0.8823.4062.00746.7343.24
Ghana0.9920.5060.00743.1239.82
Grenada0.3101.0018.0031.271.14
Sierra Leone0.3100.7024.0030.920.82
Togo0.3101.2077.0079.168.55
Total46.80
Tea
Demand elasticity1
(-0.1, -0.4)
Supply elasticity
for others1 (0.3)
India0.61126.7054.0728.78
Sri Lanka0.71118.7046.00344.7333.12
Total45.40
Rubber
Demand elasticity1
(-0.5, -0.8)
Supply elasticity
for others1 (0.4)
Indonesia0.41225.0010.00334.0524.36
Malaysia0.21249.1021.00366.6747.89
Sri Lanka0.4103.9053.0038.025.92
Thailand0.21214.5040.00720.6014.97
Total92.50
Bananas
Demand elasticity1
(-0.5)
Supply elasticity
for others1 (0.1)
Costa Rica0.11317.3012.00329.2017.51
Honduras0.11317.0029.00729.1517.53
Total34.30
Cotton
Demand elasticity1
(-0.2, -0.4)
Supply elasticity
for others1 (0.8)
Chad0.1100.507.0030.510.42
Sudan0.5143.2040.O074.662.89
Togo0.1100.1012.0030.100.09
Total3.80
Sugar
Demand elasticity1
(-0.2, -1.9)
Supply elasticity
for others1 (0.4)
Dominican Rep.0.8102.6013.0034.711.26
Mauritius0.8101.9017.0033.610.97
Total4.50
Rice
Demand elasticity1
(-0.4, -0.8)
Supply elasticity
for others1 (0.6)
Brazil0.3100.1040.0070.130.09
Thailand0.31519.6040.00724.0517.04
Total19.70
Bauxite
Demand elasticity1
(-1.3)
Supply elasticity
for others1 (0.4)
Jamaica0.4106.9028.0O34.704.70
Tin
Demand elasticity1
(-0.2, -0.5)
Supply elasticity
for others1 (1.2)
Malaysia0.71633.4020.00330.424.29
Note: … = not available.Sources: International Monetary Fund, International Financial Statistics (Washington), various issues, and Government Finance Statistics Yearbook, 1984, Vol. 8 (Washington); World Bank, Commodity Trade and Price Trends (Washington); and Jere R. Behrman, International Commodity Agreements: An Evaluation of the UNCTAD Integrated Commodity Programme, Monograph No. 9 (Washington: Overseas Development Council, 1977). Estimates are based on equation (2) of Section II.

All demand elasticities and supply elasticities for other countries are from Behrman (1977). Estimates of demand elasticities generally have a low and a high figure.

Simple average for the country as reported in Hossein Askari and John Thomas Cummings, “Estimating Agricultural Supply Response with the Nerlove Model: A Survey,” International Economic Review (Osaka, Japan), Vol. 18 (June 1977), pp. 257-92.

Includes explicit and implicit export taxes. The explicit export tax is calculated as the ratio of export tax revenue to the value of exports of a given commodity and the implicit export tax is derived from World Bank, World Development Report, 1981 (New York: Oxford University Press, 1981).

Estimate for Africa in World Bank (1981).

Average in World Bank (1981).

Estimate for Latin America (excluding Brazil and Colombia) in World Bank (1981).

Incorporates only explicit export taxes calculated as the ratio of export tax revenue to the value of exports of a given commodity.

Estimate for Côte d’Ivoire reported in Askari and Cummings (1977).

Average for Ghana in Askari and Cummings (1977).

See Behrman (1977).

Reported in W. Labys and J. Hunkeler, “Survey of Commodity Demand and Supply Elasticities,” United Nations Conference on Trade and Development, Research Memorandum No. 48 (unpublished, March 19, 1974).

As reported for individual countries in Askari and Cummings (1977).

See Jean Paul Valles, The World Market for Bananas, 1964-72: Outlook for Demand, Supply, and Prices (New York: Praeger, 1968).

Reported for Sudan in Askari and Cummings (1977).

Average reported in Askari and Cummings (1977).

Reported in William L. Baldwin. The World Tin Market: Political Pricing and Economic Competition (Durham, North Carolina: Duke University Press, 1983).

Note: … = not available.Sources: International Monetary Fund, International Financial Statistics (Washington), various issues, and Government Finance Statistics Yearbook, 1984, Vol. 8 (Washington); World Bank, Commodity Trade and Price Trends (Washington); and Jere R. Behrman, International Commodity Agreements: An Evaluation of the UNCTAD Integrated Commodity Programme, Monograph No. 9 (Washington: Overseas Development Council, 1977). Estimates are based on equation (2) of Section II.

All demand elasticities and supply elasticities for other countries are from Behrman (1977). Estimates of demand elasticities generally have a low and a high figure.

Simple average for the country as reported in Hossein Askari and John Thomas Cummings, “Estimating Agricultural Supply Response with the Nerlove Model: A Survey,” International Economic Review (Osaka, Japan), Vol. 18 (June 1977), pp. 257-92.

Includes explicit and implicit export taxes. The explicit export tax is calculated as the ratio of export tax revenue to the value of exports of a given commodity and the implicit export tax is derived from World Bank, World Development Report, 1981 (New York: Oxford University Press, 1981).

Estimate for Africa in World Bank (1981).

Average in World Bank (1981).

Estimate for Latin America (excluding Brazil and Colombia) in World Bank (1981).

Incorporates only explicit export taxes calculated as the ratio of export tax revenue to the value of exports of a given commodity.

Estimate for Côte d’Ivoire reported in Askari and Cummings (1977).

Average for Ghana in Askari and Cummings (1977).

See Behrman (1977).

Reported in W. Labys and J. Hunkeler, “Survey of Commodity Demand and Supply Elasticities,” United Nations Conference on Trade and Development, Research Memorandum No. 48 (unpublished, March 19, 1974).

As reported for individual countries in Askari and Cummings (1977).

See Jean Paul Valles, The World Market for Bananas, 1964-72: Outlook for Demand, Supply, and Prices (New York: Praeger, 1968).

Reported for Sudan in Askari and Cummings (1977).

Average reported in Askari and Cummings (1977).

Reported in William L. Baldwin. The World Tin Market: Political Pricing and Economic Competition (Durham, North Carolina: Duke University Press, 1983).

Table 1 also shows estimates of actual average export duty rates by commodity and by country. In the cases where information was available, the actual export duty rates incorporate both explicit and implicit export duties (see Table 8 for details on implicit export duties); in other cases only explicit export duties were considered. Hence, tax rates shown in column 4 are not fully comparable across commodities and countries.

The last column of Table 1 shows the authors’ estimates of country optimal export taxes, by country, for commonly taxed export commodities, based on the methodology derived in Section II.29

The values of supply and demand elasticities and market shares are combined through equations (1), (2), and (3) to estimate the country optimal export duty for each commodity. Since the changes in tax rates simulated in this section give rise to changes in market shares, an iterative procedure is used to reflect these changes. Hence, country optimal export duties are first calculated for each country using historical data on the observed market shares. The export tax is adjusted to the level that is country optimal, giving rise to a change in price and exports that is reflected in the market shares. The new shares are then used to recalculate the country optimal export taxes again; this procedure is repeated over and over. The results are shown as high and low estimates, using the high and low values for the elasticity of demand that appear in the first column of Table 1. It goes without saying that the estimated optimal tax rates given in Table 1 should be interpreted with extreme caution, as the reliability of the elasticity estimates compiled in that table has not been checked. The estimated optimal tax rates should at best be considered illustrative of the way the methodology developed in this paper can be used; this point cannot be overemphasized. Determining the specific optimal tax rates for any export commodity, by country, requires that accurate and country specific elasticity estimates be made and more detailed study conducted, neither of which the authors have done in this paper.

Subject to this qualification, the main results derived from analyzing the estimated optimal tax rates given in Table 1 are as follows.

First, as far as the levels of export taxation in developing countries are concerned, the country optimal export tax rates for selected export commodities, which include coffee, cocoa, rubber, tea, bananas, and tin, are greater than zero for several countries. These commodities frequently have relatively inelastic demand and supply schedules. As is apparent from Table 1, the production of a few export commodities is concentrated heavily in a handful of developing countries; consequently, the estimated country optimal tax rates are high for a few countries, which are the main producers. If the illustrative estimates given in Table 1 are to be relied upon, Colombia and Brazil could tax coffee at a marginal rate between 20 percent and 48 percent; Ghana and Côte d’Ivoire could tax cocoa at a rate between 40 percent and 45 percent; and Malaysia could tax rubber exports and India could tax tea exports at a rate of about 50 percent. The rates for the smaller producers, however, are considerably lower than those calculated for the main producers. For instance, for 22 of the 37 cases analyzed in Table 1, the country optimal export duty rates estimated under the high assumption are below 10 percent, and for 17 of the cases, the country optimal export duty rates estimated under the high assumption are below 5 percent.

Second, the information given in the third column of Table 1 and the Annex shows that developing countries generally tax the exports of those commodities that can be taxed according to the country optimal criteria. However, the levels of taxation adopted by individual countries do not seem to correspond to the estimated country optimal tax levels. Most developing countries seem to overtax exports as a result of high “explicit” and “implicit” export taxes (see Table 1).30 There are 31 cases, out of a total of 37 in Table 1, in which export taxes exceed the estimated country optimal level of taxation.

The empirical evidence, therefore, shows that the majority of developing countries in the sample are overtaxing exports and further that, in general, the observed level of export taxation cannot be justified on the basis of the country optimal export duty criterion. The reliability of this conclusion, of course, hinges on the reliability of the elasticity estimates used above as well as the methodology used in this study for estimating the country optimal export duty rates.

This section also estimates, with the help of the methodology developed in Section II, the effect of high export taxes (relative to country optimal levels) on the supply of exports and foreign exchange earnings of developing countries.31 The country optimal tax rates estimated above are plugged into equation (7) to estimate the effect on the price of the commodity, and this value is used to estimate the effect of the tax change on exports through equation (4). It should be mentioned at this point that the methodology measures the net impact on the total volume of exports of the country only if the factors of production released by the taxed export activity are employed by nonexport activities. Table 2 shows the estimated effects of explicit and implicit export taxes on commodity exports by country, taking as a point of reference the levels of exports that would result if the high and low values of the country optimal export taxes, estimated in Table 1, were applied. The main conclusion that can be derived from Table 2 is that the overtaxation of exports by most of the selected developing countries has a significant depressing effect on the volume of output of the taxed commodities.

The estimated reduction in output for the generally overtaxed commodities, such as coffee, cocoa, cotton, rice, and bauxite, is quite high, especially if the low estimated values of the country optimal tax rates are used as the point of reference.32 It would appear that for many of the individual countries, the lowering of export tax rates would significantly increase the output of the taxed commodity, if the elasticity estimates are to be trusted. For instance, coffee exports from Côte d’Ivoire, El Salvador, Ethiopia, Sierra Leone, Tanzania, and Togo, cocoa exports from Togo, rubber exports from Sri Lanka, and cotton exports from Sudan could increase more than 40 percent if these countries lowered their export duties to the country optimal level. Furthermore, exports of coffee from Honduras, Rwanda, and Uganda, exports of cocoa from Côte d’Ivoire and Ghana, and rice exports from Brazil could increase from 20 percent to 40 percent if these countries lowered their export duties. Other countries, such as Guatemala, Haiti, Jamaica, Mauritius, and Thailand, would have more modest, but still significant, increases in their volume of exports of the taxed commodities if they lowered their export taxes. Very few countries with large world market shares, such as Colombia for coffee and Malaysia for rubber, would decrease the volume of exports of the indicated commodity if country optimal export duties were adopted.

Table 2.Partial Effects of Adopting Country Optimal Export Duties on Exports and Foreign Exchange(Percentage change)
Effect on

Exports
Effect on

Foreign Exchange
High1Low2High1Low2
Coffee
Brazil14.8048.676.7417.02
Burundi17.3818.0615.7316.34
Colombia-14.45-7.70128.0768.51
Costa Rica2.844.090.670.99
Côte d’Ivoirc56.5073.2747.5560.65
El Salvador39.7151.8429.3737.56
Ethiopia38.9244.6932.0836.63
Guatemala11.6114.457.108.77
Haiti18.8319.3217.8118.27
Honduras25.8527.8922.6924.40
Rwanda20.1120.8318.6219.29
Sierra Leone43.5344.0342.8043.29
Tanzania58.3463.3753.0857.53
Uganda21.0824.7215.5418.13
Togo1,197.541,581.411,169.841,534.17
Cocoa
Côte d’Ivoire28.5938.5414.9918.96
Ghana35.5346.0318.0922.20
Grenada6.486.555.865.92
Sierra Leone9.9910.049.529.57
Togo528.05559.25505.14533.83
Tea
India-17.48-6.4450.2418.69
Sri Lanka1.2710.870.444.84
Rubber
Indonesia-8.73-5.5578.6950.03
Malaysia-9.54-5.9763.0839.67
Sri Lanka57.5962.6429.4131.79
Thailand6.588.740.660.80
Bananas
Costa Rica-1.87-0.6124.267.96
Honduras-0.051.580.16-5.52
Cotton
Chad0.700.710.630.64
Sudan40.2641.6136.6437.85
Togo1.371.371.361.36
Sugar
Dominican Rep.7.9411.693.935.63
Mauritius14.3317.7510.3612.71
Rice
Brazil24.8824.9124.7924.83
Thailand7.9812.062.834.14
Bauxite
Jamaica14.4314.436.696.69
Tin
Malaysia-7.0012.483.777.47
Sources: International Monetary Fund, International Financial Statistics (Washington), various issues, and Government Finance Statistics Yearbook, 1984, Vol. 8 (Washington); and Jere R. Behrman, International Commodity Agreements: An Evaluation of the UNCTAD Integrated Commodity Programme, Monograph No. 9 (Washington: Overseas Development Council, 1977). See Section II for methodology employed.

The high estimate corresponds to the high value of the elasticity of demand employed and measures the effect on output and foreign exchange relative to the level that would prevail if optimal export duties were adopted.

Thc low estimate corresponds to the low value of the elasticity of demand.

Sources: International Monetary Fund, International Financial Statistics (Washington), various issues, and Government Finance Statistics Yearbook, 1984, Vol. 8 (Washington); and Jere R. Behrman, International Commodity Agreements: An Evaluation of the UNCTAD Integrated Commodity Programme, Monograph No. 9 (Washington: Overseas Development Council, 1977). See Section II for methodology employed.

The high estimate corresponds to the high value of the elasticity of demand employed and measures the effect on output and foreign exchange relative to the level that would prevail if optimal export duties were adopted.

Thc low estimate corresponds to the low value of the elasticity of demand.

High export taxation also has a depressing effect on the average foreign exchange earnings by commodity. In most cases, the impact on foreign exchange earnings is similar to, though somewhat smaller than, the effect on output. Those countries that are overtaxing the export commodities could increase their foreign exchange earnings if they lowered the level of export tax rates (for example, on coffee, see Côte d’Ivoire, Tanzania, and Togo; on cocoa, see Togo; on rubber, see Sri Lanka; and on cotton, see Sudan).

To conclude, in the majority of cases analyzed, the observed levels of export taxation seem high and are detrimental to both the level of exports and foreign exchange earnings. Hence, the supply-side prescription of reducing export taxes, in most cases, would not only increase the volume and the value of exports but could also enhance welfare. Furthermore, a number of countries could lower export taxes to the country optimal level and increase tax revenue by transforming the nonrevenue-yielding implicit export taxes into revenue-yielding export taxes. The last result is particularly relevant for those countries that have a relatively large share in the world market and that are currently overtaxing exports by way of nonrevenue-yielding implicit taxes.33

Qualifying the Interpretation of Country Optimal Export Duties

The preceding generalizations need to be qualified. First, certain imperfections in the commodity markets could preclude some developing countries from benefiting, in the short run, from lowering export taxes. As was noted before, the commodity agreements and certain import restrictions imposed by industrial countries predetermine, in the short run at least, the feasible level of exports. Any small country that wants to increase output by lowering export taxes may have to sell its output in nonquota markets at a discount. This qualification applies especially to commodities such as coffee, cocoa, tin, rubber, sugar, cotton, and tobacco.

Second, the methodology developed throughout this paper assumes that there are no other relevant distortions in the economy. For the actual application of the above methodology as a tool for policymaking, this assumption should be checked. In most developing countries, it is likely that other agricultural producer prices are also distorted. The increase (or decrease) in production of the taxed commodity would lead to a reduction (or increase) in the production of other agricultural products and could generate positive or negative external effects that should be taken into consideration.

Third, the country optimal export duty should, in general, be estimated taking into account the effect of the export duty on the price of close substitutes and complements in demand and in production. The adjustment is particularly relevant for such commodities as coffee, tea, and cocoa that are close substitutes in demand, but it should also be made in other pertinent cases. The adjustment, however, is expected to increase the value of the optimal export duty relative to the estimates derived above.34

Fourth, the approach used here, static partial equilibrium, has its limitations. In a dynamic context it could be expected that a high price of export commodities would lead to technical innovation, either in the form of more efficient use of inputs or creation of substitutes; either of the two would reduce further the demand for the commodity. The dynamic demand function is thus expected to be more elastic than the static one. When general equilibrium considerations are taken into account, the increase in exports in one sector could be compensated by the decline of exports in other activities. The only way of solving this problem is by estimating optimal export duties in a general equilibrium model that takes into account all the interaction that one policy measure generates in the economy.

Fifth, the assumption of constant elasticities for demand and supply has its limitations that can lead to error, because the correct functional specification could be a variable supply function.

Sixth, it is assumed in the analysis that all countries act independently, so that there is no strategic reaction from either producers or consumers when the export duty is changed. In the real world, countries might react strategically to tax changes in forms that could invalidate the optimality of a given export duty derived under the assumption of nonstrategic behavior.

Seventh, the approach followed to estimate country optimal export duties in this paper does not incorporate any distributional considerations. Since export commodities are often produced by low-income farmers in developing countries, it is very likely that export taxes are quite regressive (Tanzi (1976) and Booth (1980)). It should be noted, however, that governments could reduce and even eliminate the regressivity of export taxes by way of income redistribution through expenditure policy. This is unlikely to happen in practice, however, because government expenditure tends to have an urban bias.

Finally, should production of the export commodity be mainly undertaken by a government enterprise, the effect of the reduction in export duty on production could be blurred:35 For example, the taxation of oil in Mexico, where it is produced under government monopoly, and the taxation of minerals in Zaïre, where production is dominated by a public enterprise, La Générale des Carrières et des Mines (Gecamines).36 In Togo, a public enterprise, Office Togolais des Phosphates (OTP), is responsible for the production and marketing of phosphates, the principal export commodity. In all such cases, the tax payment is determined in accordance with the budgetary needs of the government, the financial situation of the public enterprise, and international market conditions. A reduction in the prevailing level of export taxes, however, might have an effect in terms of attracting new private investment into these sectors, provided market entry were permitted.

Impact of Stabilization Schemes

Whether or not the commodity agreements have attained the purported objectives and improved economic well-being is an empirical question that lies beyond the scope of this paper.37 Nonetheless, one can still form some notion of their impact on the efficiency of production given the theoretical proposition that a stabilization scheme that reduces the variability of the producers’ income without reducing the mean would improve welfare (see section on “Export Duties in Connection with Stabilization Schemes,” above).

Table 3 shows the coefficient of variation in domestic producer and export prices. Wherever the coefficient of variation of the former is less than that of the latter, the stabilization scheme could be judged as having achieved its objectives. Calculations given in Table 3 suggest that the marketing agencies stabilized domestic producer prices only in 12 out of 17 cases.

Table 3.Selected Developing Countries: Selected Indicators of the Impact of Stabilization Schemes on Producer Prices(In percent)
Coefficient of VariationRatio of

Producer
Period

Covered
Producer priceExport pricePrice to

Export Price
Coffee
Côte d’Ivoire1972-81345140
Haiti1970-84524951
Papua New Guinea1979-831321171
Rwanda1974-84151957
Sierra Leone1972-83665957
Cocoa
Côte d’Ivoire1972-81354055
Ghana1971-8312613152
Nigeria1972-81514168
Papua New Guinea1979-831627128
Sierra Leone1972-83523958
Palm kernels
Nigeria1972-81283792
Sierra Leone1972-83537659
Groundnuts
Senegal1976-84253533
Gambia, The1975-831133
Copra
Papua New Guinea1979-832339103
Rice
Thailand1970-82354243
Cotton
Chad1974-84222045
Sources: Publications of marketing organizations, central banks, statistical bureaus, and other official agencies.
Sources: Publications of marketing organizations, central banks, statistical bureaus, and other official agencies.

The extent of stabilization in producers’ prices was particularly well pronounced with respect to exports of coffee, cocoa, and copra from Papua New Guinea and groundnuts from The Gambia. In contrast, the schemes proved to be destabilizing with respect to exports of coffee from Haiti and Sierra Leone, exports of cocoa from Nigeria and Sierra Leone, and exports of cotton from Chad.

The stabilization of producer prices does not, of course, reflect the efficiency gain, which depends on the reduction in the variability of producers’ income and such other factors as transfers to consumers and overall macroeconomic impact of the schemes.38 While data on producers’ incomes and export earnings are available only on a fragmentary basis for some countries (only for three commodities exported from three countries), no statistics whatsoever are available on other factors. The available data have provided the basis of computing the coefficients of variations in producers’ incomes and export earnings, set out in Table 4, which suggest that out of six observations, only in two cases, namely, exports of palm kernels from Nigeria and Sierra Leone, did the producers’ incomes vary to a smaller extent than export earnings. In contrast, in two other cases, namely, exports of cocoa from Ghana and Sierra Leone, the activities of the marketing agencies destabilized producers’ incomes. In the remaining two cases, stabilization schemes seemed to have had no impact.

Table 4.Selected Developing Countries: Coefficients of Variations in Producers’ Incomes and Export Earnings
PeriodCoefficient of Variation in
CoveredProducers’ incomesExport earnings
Cocoa
Ghana1971-8310295
Nigeria1972-813231
Sierra Leone1972-836249
Coffee
Sierra Leone1972-835959
Palm kernels
Nigeria1972-813053
Sierra Leone1972-834559
Sources: Publications of marketing organizations, central banks, statistical bureaus, and other official agencies.
Sources: Publications of marketing organizations, central banks, statistical bureaus, and other official agencies.

The stabilization of producers’ prices for these commodities was financed by means of formal export duties accruing to the marketing agencies in some of these countries and, more important, by way of implicit export taxes in the form of the differential between export prices received by these agencies and the amount paid to growers. Table 3 sets out such differentials with respect to these commodities exported, in the form of the ratio of average producer prices to export prices realized over extended periods of time. Although the ratios incorporate the distribution costs incurred by these agencies, one can still infer from them that the agencies absorb an inordinately large proportion of export receipts, ranging from 8 percent on palm kernels exported from Nigeria to 67 percent on groundnuts exported from Senegal. Insofar as not all of the revenues collected by the marketing agency are distributed to producers over time, they represent the tax implicit in the administration of the scheme. The figures in Table 3 also suggest that in Papua New Guinea the producers of coffee, cocoa, and copra have been subsidized by the Government.

IV. Conclusions

Two major conclusions can be derived. First, most of the developing countries used as illustration in this chapter seem to be overtaxing exports of the selected commodities. This becomes particularly apparent when the high implicit export taxes prevalent in many of these countries are also taken into account. The overtaxation of exports is also suggested by the operation of commodity stabilization schemes that, as indicated above, markedly reduce the present value of revenue to producers without similarly reducing riskiness. Hence, the observed levels of export taxation cannot, in general, be justified on grounds of the country optimal export duty argument or based on commodity stabilization. Second, the estimates made here show that the overtaxation of exports of certain commodities may have reduced substantially the level of exports of these commodities for the majority of the countries under study. It also seems to have reduced the level of foreign exchange earnings in most of the cases analyzed.

The main policy recommendation that emerges is that lowering the explicit and implicit levels of export taxation would be advisable not only from a supply-side perspective but also from the point of view of economic efficiency. Over the short and medium runs, however, the existence of market imperfections, introduced by both commodity agreements and protectionism imposed by industrial countries, could well preclude exporting countries from benefiting from the supply-side effects of lowering export taxes and expanding their exports;39 at the same time government revenues would be lowered.

The ensuing loss of government revenue, in most cases, may turn out to be a major obstacle in lowering export taxes. Many of the developing countries have few alternative sources of revenue, given the difficulties that could be encountered in the administration of more sophisticated, but less distortive, tax systems. It should be mentioned that many of the countries under review could reduce effective levels of taxation and promote exports without losing revenue (and in a few cases even gaining revenue), if the implicit (nonrevenue-yielding) export duties were transformed into formal (revenue-yielding) export taxes. Furthermore, in many instances the reduction of export duties could be undertaken along with the devaluation of the exchange rate, in which case the impact of lowering the tax rates on tax revenue would be reduced and could even lead to an increase in government revenue.

ANNEX
Levels and Structure of Export Duties in Developing Countries

Export taxes exist in 71 developing countries, as shown in Table 5, and are levied on a wide range of primary commodities. In 29 developing countries, export tax revenue constitutes more than 1 percent of GDP and, with some minor exceptions, over 10 percent of the total tax revenue (Table 6). This Annex will, therefore, focus on the levels and structure of export taxes in these 29 developing countries only. In most cases, the export tax revenue is derived from one or two commodities that feature prominently in the exports of these countries. Coffee is the most widely taxed commodity and is the most important source of export tax revenue in 13 of the 29 countries listed in Table 6. Furthermore, beverage crops, which comprise coffee, tea, and cocoa, are the most important source of tax revenue in 17 of the 29 countries under review. Other export commodities commonly taxed are rice, sugar, copra, bananas, groundnuts, palm kernels, cotton, rubber, wood, bauxite, tin, phosphates, copper, and petroleum.

Levels and Structure of Export Taxation

To analyze the level of export taxes and to make comparisons across countries, the section examines three different indicators.

Table 5.Developing Countries: Significance of Export Taxes
Ratio of
GNP

Per Capita,

Around 1980
Period1Total tax

to GDP
Export

duties

to GDP
Export

duties to

total tax
Export

duties

to total

exports
(In U.S. dollars)(In percent)
Gabon3,4201974-7620.690.995.341.49
Bahamas2,7701977-7916.360.321.95
Uruguay2,6201980-8220.980.010.02
Argentina2,5901979-8114.110.171.252.62
Brazil2,1601979-8117.100.321.844.35
Mexico1,9801979-8114.292.56217.71232.01
Panama1,7301979-8121.030.401.884.07
Fiji31,6501979-8118.770.442.342.22
Seychelles1,5801975-7719.220.140.72
Malaysia1,5801979-8122.824.4019.328.43
Syrian Arab Rep.1,4801979-819.960.282.761.84
Paraguay1,4101979-8110.100.070.660.45
Costa Rica1,3901979-8116.952.0412.07
Tunisia1,2601979-8124.660.281.121.02
Colombia1,2601977-7910.961.4713.3012.01
Côte d’Ivoire1,110198020.652.3011.157.69
Ecuador1,1001979-8110.490.403.951.84
Jamaica1,0901975-7723.096.79429.2740.82
Peru1,0801980-8217.191.669.448.65
Mauritius1,0801979-8119.212.8514.789.00
Guatemala1,0801979-819.421.5015.85
Congo880198026.870.070.270.13
Nigeria8701976-7819.780.010.04
Morocco8301979-8121.570.281.312.00
Papua New Guinea7801979-8117.780.452.621.30
Nicaragua7601978-8014.750.563.29
Cameroon7301980-8221.501.598.757.48
Vanuatu7151982-8410.146.13
Philippines7101979-8111.180.201.751.30
El Salvador6701980-8211.182.6924.06
Thailand6701980-8212.710.383.001.92
Grenada6501975-7719.683.2917.00
Swaziland6501978-8026.072.027.76
Western Samoa5741983-8526.243.3511.7613.49
Bolivia5701980-826.240.040.620.24
Honduras5601979-8113.502.4217.940.82
Egypt5501977-7927.800.341.11
Guyana520198534.370.341.000.74
Liberia5001979-8122.700.140.630.23
Solomon Islands4901983-8521.334.1319.257.79
Lesotho4701975-7719.920.160.822.12
Indonesia4501979-8120.180.663.39
Yemen Arab Rep.4301979-8118.020.010.33
Senegal4201978-8020.560.693.411.87
Mauritania4001977-7916.640.110.670.47
Ghana3901980-826.041.0113.4911.21
Kenya3901979-8120.630.180.850.88
Sudan3601978-8011.400.383.215.23
Togo3501978-8026.701.274.714.65
Madagascar3501972-7315.520.936.01
Pakistan3101979-8112.960.191.491.13
Central African Rep.3101981-8114.971.5710.4513.86
Sierra Leone3001979-8115.181.6510.9310.21
Niger3001978-8011.720.554.702.70
Benin2901977-7916.330.291.77
Haiti2801980-8210.160.959.53
Tanzania2701979-8117.781.005.738.87
Sri Lanka2701979-8119.276.2531.9923.05
Somalia2601976-7819.650.381.962.62
India2301979-8110.750.090.791.55
Rwanda2201978-8011.132.8825.4233.03
Gambia, The2201976-7814.641.5010.36
Burundi2101979-8111.941.4111.1915.94
Zaïre2001979-8117.953.2217.8815.26
Burkina Faso2001978-8013.290.433.26
Uganda2001980-822.090.6728.2468.53
Mali1901979-8112.610.584.59
Nepal1401979-816.750.253.72
Bangladesh1301976-787.540.131.72
Ethiopia1301976-7812.072.9123.4431.04
Chad110l974-769.330.778.370.13
Note: … = not available;—= negligible.Sources: International Monetary Fund, Government Finance Statistics Yearbook, 1984, Vol. 8 (Washington), and International Financial Statistics (Washington), various issues; and Fund staff estimates.

Tax data given in this table pertain to these years.

Export taxes have been abolished and the corresponding revenue is raised through the transfer of profits by Petróleos Mexicanos (Pemex).

Export duty on sugar suspended since 1983.

Includes production tax on bauxite.

Note: … = not available;—= negligible.Sources: International Monetary Fund, Government Finance Statistics Yearbook, 1984, Vol. 8 (Washington), and International Financial Statistics (Washington), various issues; and Fund staff estimates.

Tax data given in this table pertain to these years.

Export taxes have been abolished and the corresponding revenue is raised through the transfer of profits by Petróleos Mexicanos (Pemex).

Export duty on sugar suspended since 1983.

Includes production tax on bauxite.

Table 6.Selected Developing Countries: Significance of Export Taxes
Ratio of

Export

Duties

to GDP
Ratio of

Export

Duties to

Total Taxes
Ratio of

Export Tax

Revenue to

Exports
Main Taxable

Commodities

(Proportion of

total exports)1
(In percent)
Burundi1.411.215.9Coffee (88)
Cameroon1.68.77.5Coffee (16)
Central African Rep.1.610.413.9Coffee (31)
Colombia1.513.312.0Coffee (50)
Costa Rica2.012.18.9Coffee (27)
Côte d’Ivoire2.311.17.7Cocoa (29)
El Salvador2.724.111.1Coffee (57)
Ethiopia2.923.431.0Coffee (66)
Gambia, The1.510.45.5Groundnuts (54)
Ghana1.013.511.2Cocoa (71)
Grenada3.317.07.6Cocoa(41)
Guatemala1.515.88.5Coffee (30)
Haiti1.09.59.9Coffee (56)
Honduras2.417.97.6Coffee (24)
Jamaica6.829.321.7Bauxite-alumina (74)
Malaysia4.419.38.4Rubber (16)
Mauritius2.814.89.0Sugar(60)
Mexico2.617.732.0Petroleum (61)
Peru1.79.48.6Minerals (40)
Rwanda2.925.433.0Coffee (66)
Sierra Leone1.610.910.2Coffee (…)
Solomon Islands4.19.87.8Copra (21)
Sri Lanka6.232.023.0Tea (34)
Swaziland2.07.8Sugar (…)
Tanzania21.05.78.9Various
Togo1.34.74.6Phosphates (29)
Vanuatu10.16.1Copra (47)
Western Samoa3.411.813.5Coconut products (66)
Zaïre3.217.915.3Copper (47)
Note: … = not available.Sources: International Monetary Fund, Government Finance Statistics Yearbook, 1984, Vol. 8 (Washington), International Financial Statistics (Washington), various issues, and International Financial Statistics: Supplement on Trade Statistics (Washington, 1982); and respective countries’ tax summaries.

Represent an average of statistics available for three most recent years or part thereof, as shown in Table 5.

Export duties on coffee, cotton, and sisal were abolished in early 1981.

Note: … = not available.Sources: International Monetary Fund, Government Finance Statistics Yearbook, 1984, Vol. 8 (Washington), International Financial Statistics (Washington), various issues, and International Financial Statistics: Supplement on Trade Statistics (Washington, 1982); and respective countries’ tax summaries.

Represent an average of statistics available for three most recent years or part thereof, as shown in Table 5.

Export duties on coffee, cotton, and sisal were abolished in early 1981.

First, Table 6 shows the ratio of export tax revenue to total exports for the 29 countries under analysis. The ratio varies from a high of 33 percent for Rwanda to a low of 4.6 percent for Togo and has an average level of 12.9 percent for the whole sample. Seventeen countries are below the average level and only five countries have a ratio exceeding 20 percent.

Second, export taxes are not necessarily payable on all exports, or at a uniform rate on all commodities. Even though the statutory rates can take the form of an ad valorem rate, a specific rate, or a composite rate, the composite (or sliding scale) rates are by far the most prominent form of duty, as can be seen from Table 7. Such composite tax rates take the form of a fixed amount of tax (i.e., basic tax) on up to a specified export price (i.e., floor price) and a progressively rising (sliding) rate of tax on successive increments in export price. With some minor exceptions, the sliding rate applies to the incremental value of export.40 A specific rate is the least common form of export duties as it applies in only 6 of the 29 countries under review (Burundi, Cameroon, the Central African Republic, Honduras, Pakistan, and Western Samoa). To maintain their comparability with ad valorem and sliding scale tax rates, such specific rates are expressed in Table 7 in terms of an ad valorem equivalent derived on the basis of prevailing price levels of export commodities to which they apply. The table indicates that the statutory rates vary from a low of 1 percent on bananas in Costa Rica to a high marginal rate of 100 percent on coffee in Rwanda and Uganda.

Table 7.Selected Developing Countries: Structure of Formal Taxes on Specific Commodities
Type of TaxTax BaseTax Rate

(Ad Valorem

or Equivalent)
(In percent)
Coffee
BurundiSpecificUnit volume8.01
CameroonSpecificUnit volume7.7
Central African Rep.Ad valoremStandard value
(valeur mercuriale)13.82
SpecificUnit volume1.12
ColombiaAd valoremTurnover value9
Costa RicaComposite:3
Basic: ad valoremF.o.b. floor price4
Marginal: ad valoremF.o.b. floor price2.5-24.0
Côte d’IvoireAd valoremStandard value23
El SalvadorAd valoremF.o.b. value10-30
EthiopiaComposite:
Basic: specificReference (or floor) price2.94
Marginal: specificExcess over it9.2-34.94
GuatemalaComposite:
Basic: ad valoremF.o.b. floor price0
Marginal: ad valoremExcess over it20
HaitiComposite:
Basic: specificF.o.b. floor price0
Marginal: ad valoremExcess over it1-15
HondurasComposite:
Basic: ad valoremF.o.b. floor price10
Marginal: ad valoremExcess over it5-10
KenyaComposite:
BasicF.o.b. floor price0
Marginal: ad valoremExcess over it10-25
Papua New GuineaAd valorem1.5-7.5
RwandaCustoms: ad valorem0-30
Fiscal: ad valorem0-100
UgandaComposite:
BasicF.o.b. floor price0
Marginal: ad valoremExcess over it100
Cocoa
CameroonSpecificUnit volume9.9
Côte d’IvoireAd valoremStandard value
(valeur mercuriale)23
GhanaComposite:
Basic: ad valoremF.o.b. floor price0
MarginalExcess over it100
GrenadaComposite:
Basic: specificF.o.b. floor price7.1
Marginal: ad valoremExcess over it20
Papua New GuineaAd valorem1.5-7.5
Tea
KenyaComposite:
BasicF.o.b. floor price0
Marginal: ad valoremExcess over it10-25
Sri LankaComposite:
Basic: specificF.o.b. floor price24.3
Marginal: ad valoremExcess over it35
Sugar
MauritiusComposite:
BasicUp to specified output

of producer
05
Additional: ad valoremExcess over it12.3-23.65
SwazilandComposite:
BasicUp to specified price

paid to millers
0
Marginal: ad valoremExcess over it50
Bananas
Costa RicaAd valoremF.o.b. value1
HondurasSpecificUnit volume9.8
Rice
PakistanSpecific (on Basmmi rice)F.o.b. price8
Ad valorem (on other)F.o.b. price30
ThailandAd valorem (tax)Posted price of paddy5
Specific (premium)F.o.b. price5.4
Nutmeg
GrenadaComposite:
Basic: specificFloor price12.3
Marginal: ad valoremExcess over it20
Groundnuts
Gambia, TheAd valorem (on unshelled)Sales contract price8
Ad valorem (on shelled)Sales contract price10
Groundnut oil
Gambia, TheAd valoremSales contract price9
Senegal06
Palm oil
MalaysiaComposite (on

unprocessed oil):
BasicGazetted floor price0
MarginalExcess over it30-50
Solomon IslandsAd valoremF.o.b. value10
Copra
Papua New GuineaAd valoremF.o.b. value1.5-7.5
PhilippinesAd valoremF.o.b. value7.5
Solomon IslandsAd valoremF.o.b. value15
TanzaniaAd valoremF.o.b. value5
VanuatuComposite:
BasicSpecified f.o.b. floor value0
MarginalExcess over it2-10
Western SamoaAd valoremF.o.b. price over threshold5
Coconut oil
Western SamoaSpecificUnit volume7.3
Rubber
MalaysiaComposite:
BasicGazetted price0
Marginal: ad valoremGazetted price20-507
Cotton
ChadFiscal duty:

ad valorem
Standard value (valeur

mercuriale)
8
Statistical tax:

ad valorem
F.o.b. value plus fiscal duty6
PakistanAd valoremF.o.b. value of raw cotton10
SudanAd valoremF.o.b. value of cottonseed158
Syrian Arab Rep.Ad valoremF.o.b. value of cotton15
TanzaniaComposite:
BasicUnit price of lint109
Marginal: ad valoremExcess of unit price of lint0-309
Wood
GabonAd valoremF.o.b. value9-3810
PhilippinesAd valoremF.o.b. value20
TanzaniaAd valoremF.o.b. value5
Copper
ZaïreExport tax: ad valoremSales value (net)1140
Surtax: ad valoremExcess over floor sales value10
Statistical taxF.o.b. export value121-10
Turnover taxBank deposits of export

proceeds
7
Bauxite
JamaicaComposite:
Basic: ad valoremAverage realized floor price6
Marginal: ad valoremExcess over it3.6
Tin (ore and
concentrates)
MalaysiaBasicGazetted floor price0
Marginal: ad valoremExcess over it20-50
Phosphates
SenegalAd valoremSize of shipment2.5-5
TogoAd valoremAdministered price over

f.o.b. price
17.1
Diamonds
Sierra LeoneAd valoremF.o.b. value3
Note: … = not available.Sources: Respective countries’ tax summaries, most current versions available.

Comprises separate levies for ordinary budget, extraordinary budget, and for development projects.

Export taxes consist of regular export duty and turnover and quality control taxes which apply at ad valorem rates and a special levy which applies at a specific rate.

Comprises taxes collected on the net income of sales to the coffee processing plant and on exports but not some nominal taxes collected for the Coffee Institute.

Basic tax consists of turnover tax at the rate of 2 percent, ad valorem equivalent of the specific rate of coffee cess (at reference prices prevailing in 1982/83) of 1.9 percent, and surtax at zero rate on specified reference (floor) prices. Marginal rates are ad valorem equivalents of specific rates of duty (also based on 1982/83 prices).

A flat rate of 10 percent on molasses.

No formal export taxes but a separate price stabilization levy applies.

Additional replanting and research cess are payable.

Suspended since the 1979/80 crop season.

Abolished since 1981.

Comprises export duty (0.5-22 percent), turnover tax (2 percent on okoumé wood), reforestation tax (1-3.5 percent), timber felling tax (0.1-5 percent), stamp tax (5 percent), and an ad valorem equivalent of several other imposts, such as the chamber of commerce and public works levies and the national unity tax, at specific rates on unit volume.

Net of marketing costs, export tax, and statistical tax.

Net of export duties.

Note: … = not available.Sources: Respective countries’ tax summaries, most current versions available.

Comprises separate levies for ordinary budget, extraordinary budget, and for development projects.

Export taxes consist of regular export duty and turnover and quality control taxes which apply at ad valorem rates and a special levy which applies at a specific rate.

Comprises taxes collected on the net income of sales to the coffee processing plant and on exports but not some nominal taxes collected for the Coffee Institute.

Basic tax consists of turnover tax at the rate of 2 percent, ad valorem equivalent of the specific rate of coffee cess (at reference prices prevailing in 1982/83) of 1.9 percent, and surtax at zero rate on specified reference (floor) prices. Marginal rates are ad valorem equivalents of specific rates of duty (also based on 1982/83 prices).

A flat rate of 10 percent on molasses.

No formal export taxes but a separate price stabilization levy applies.

Additional replanting and research cess are payable.

Suspended since the 1979/80 crop season.

Abolished since 1981.

Comprises export duty (0.5-22 percent), turnover tax (2 percent on okoumé wood), reforestation tax (1-3.5 percent), timber felling tax (0.1-5 percent), stamp tax (5 percent), and an ad valorem equivalent of several other imposts, such as the chamber of commerce and public works levies and the national unity tax, at specific rates on unit volume.

Net of marketing costs, export tax, and statistical tax.

Net of export duties.

Third, Table 8 (column 1) shows the effective rate of export tax for each commodity. This is measured as a ratio of tax revenue to total export value (f.o.b.) of that commodity. There is substantial variability by country and by type of commodity. Coffee, for instance, is taxed, on the average, at 17 percent; however, actual rates may range between a high of 25 percent in Tanzania to a low of 1 percent in Brazil. Cocoa is taxed at an average rate higher than that of coffee (20 percent); the actual rate, however, reaches 23 percent in Côte d’Ivoire. The average export tax rate for all commodities and all countries included in the first column of Table 8 is about 17 percent—somewhat higher than the ratio of export tax revenue to total exports shown in Table 6, since most countries tend to tax only the export of selected commodities.

Table 8.Selected Developing Countries: Estimated Implicit Export Tax Levels by Commodity(In percent)
Formal Export Tax1

1979-81
Total Implicit and

Formal Export Tax2

1980-81
Coffee
Brazil159
Côte d’Ivoire2364
El Salvador1647
Honduras1532
Tanzania2541
Togo2077
Cocoa
Côte d’Ivoire2362
Ghana1860
Togo1677
Rubber
Thailand1040
Bananas
Honduras1129
Cotton
Sudan1540
Rice
Brazil40
Thailand2340
Sources: International Monetary Fund, Government Finance Statistics Yearbook (Washington), various issues, and International Financial Statistics (Washington), various issues; and World Bank, Accelerated Development in Sub-Saharan Africa: An Agenda for Action (New York: Oxford University Press, 1981), World Development Report, 1981 (New York: Oxford University Press, 1981), and World Development Report, 1982 (New York: Oxford University Press, 1982).

Ratio of export tax to value of exports of the taxable commodity. This is called the formal export tax.

Estimated in World Development Report, 1981 and World Development Report, 1982. The sources of the estimation of rates of formal and implicit export taxes are different; therefore, the two columns may not be comparable. Estimated implicit tax is inclusive of the formal tax as indicated in the estimates of total export taxation made in World Development Report, 1981 and World Development Report, 1982.

Sources: International Monetary Fund, Government Finance Statistics Yearbook (Washington), various issues, and International Financial Statistics (Washington), various issues; and World Bank, Accelerated Development in Sub-Saharan Africa: An Agenda for Action (New York: Oxford University Press, 1981), World Development Report, 1981 (New York: Oxford University Press, 1981), and World Development Report, 1982 (New York: Oxford University Press, 1982).

Ratio of export tax to value of exports of the taxable commodity. This is called the formal export tax.

Estimated in World Development Report, 1981 and World Development Report, 1982. The sources of the estimation of rates of formal and implicit export taxes are different; therefore, the two columns may not be comparable. Estimated implicit tax is inclusive of the formal tax as indicated in the estimates of total export taxation made in World Development Report, 1981 and World Development Report, 1982.

Implicit Taxes on Exports

The second column in Table 8 shows the estimated implicit tax for some of the commodities. It is based on the estimation of the nominal protection coefficients (NPCs) of selected export commodities made by the World Bank (1981) and (1982), which takes into account “tariffs, quotas, and nontariff barriers that protect farmers as well as the impact of export taxes on restrictions that penalize farmers.”41 To the extent that protection is also a function of the country’s exchange rate, it is also included in the computation of NPCs.42 Implicit tax data incorporate the effect of both formal export taxes and implicit export taxes. Even though information is incomplete, it is clear that implicit export taxes can substantially raise the total effective burden of export taxation, such that the average implicit rate on export is more than doubled when implicit export taxes are incorporated.

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The Annex to this chapter contains summary information on the levels and structure of export duties prevalent in many developing countries. For a review of the quantitative characteristics of the tax systems of developing countries, including export taxes, see Tanzi (1987).

see Gandhi (Chapter 9) for a review of the main issues regarding the application of supply-side economics to the tax levels and structures of developing countries.

There is little reference to export taxes in the public finance literature; however, there is an implicit belief by some public finance specialists that such taxes are more closely related to income (or direct) taxes than to excise (or indirect) taxes. See, for instance, Prest (1972), who argues that insofar as such taxes do not cover output assigned to the home market, they are only a partial substitute for income taxation of agricultural producers. In the international trade literature, they are treated as equivalent to import tariffs because from a general equilibrium point of view export duties and import tariffs reduce the size of the international trade sector. See Corden (1974).

See Aguirre, Griffith, and Yücelik (1981), Goode, Lent, and Ojha (1966), Goode (1984), and Tanzi (1976), who discuss extensively the role of export duties in developing countries.

Export duties are also used to promote the growth of the untaxed activities by changing the producer terms of trade against traditional exports. This rationale for export duties is not pursued here since import tariffs are more commonly employed for this purpose. See Corden (1974).

Quotas can also be used instead but in that event monopoly profits accrue to individual producers rather than to the government.

See Corden (1974) and Johnson (1968).

For instance, domestic sugar production is protected in the European Community (EC) countries and the United States; tobacco is protected in the United States; and rice is protected in Japan.

Of the five international commodity agreements that were in existence in the early 1980s, only those for coffee, cocoa, and rubber are fully operational at present. An arrangement for stabilizing sugar prices through export quotas and special stock provisions lapsed after 1983, following the lack of agreement among the parties concerned. The tin agreement lapsed in October 1985 when it ran out of resources required to finance buffer stock purchases. See Singh (1977) for a discussion of the coffee and the cocoa agreements; Baldwin (1983) for the tin agreement; and Hart (1976) for the use of export taxation in connection with commodity agreements.

Given that exports to the quota market are restricted, the marginal social revenue to the exporting country is equal to the free trade nonquota price. Optimality would dictate equality between the marginal social revenue and the marginal social cost. If the expected producer price (private marginal revenue) is a weighted average of the free and protected market price, the producer will tend to produce more than what is actually optimal in the hope that he can export more to the quota market. An export tax could close the gap between the private and the social marginal revenue.

This is strictly true of export duties levied by a country that is a price taker in the world market and faces a perfectly elastic demand curve for its exports. Hence, a tax imposed on exports will, by necessity, be shifted back to producers. When exports are intermediated by traders, part of the tax burden can be borne by them as well. See Tanzi (1976).

A tax on the income of an immovable factor of production is nondistortionary because it does not alter either the level of production or the level of exports of the commodity that employs the taxed factor, since the factor of production has no alternative use.

The section on “Estimation of Country Optimal Export Taxes,” below, presents the elasticities of supply of export commodities that have been estimated in the literature for developing countries; they are all positive, though small.

The land used in the production of certain cash crops is not necessarily suitable for the production of other crops.

Owing to space considerations, the proof of this proposition is not included here. See Mussa (1974) who derives the above result for an import duty.

See Davis (1980) who analyzes the resurgence of export taxation in developing countries after the second oil crisis and the increase in commodity prices in the late 1970s.

For the sake of symmetry, this argument would require that producers are subsidized when a windfall loss occurs.

The international price of a commodity is a random variable. Even though one might attempt to forecast future values, nobody can predict with certainty the price of a commodity at every moment of time. For some commodities there are futures or forward markets which allow producers to reduce the risk involved in the production process, but these markets do not work as efficiently for all types of commodities.

Stabilization efforts in these areas have been attempted by a number of developing countries mostly through marketing boards, but export taxes have also been used as one of several complementary policy instruments to attain the desired goal. The effect of country-specific commodity stabilization schemes on the level and the variability of producer prices is analyzed in the section on “Impact of Stabilization Schemes,” below.

See Newbery and Stiglitz (1981) for the economic rationale for stabilization.

Helleiner (1964) and (1966a) examined the role of commodity marketing boards in Nigeria in stabilizing prices paid to producers and their incomes.

See Newbery and Stiglitz (1981) for cases where the stabilization of prices is likely to lead to the stabilization of incomes. Johnson (1977) makes a case where price stabilization around the trend will decrease revenue, since the supply curve of exports is upward sloping. See Behrman (1977} for the generalization of the Johnson result.

See Helleiner (1966b, Chapter 6) for this line of approach.

Equations (2) and (3) result from the logarithmic changes of exports of commodity k by each exporting country resulting from a given change in the export price.

The country optimal export tax given by equations (1) to(3) assumes that exporting countries act independently of each other. Hence, for a given value of the export market demand elasticity and the elasticity of supply of other exporters, the optimal export tax of commodity i in country k will be higher the larger the export market share. An alternative estimate of the optimal export tax would result from the assumption that the exporting countries collude and agree on a common export tax, which, in order to be optimal, should be equal to 1/ηk. The collusion agreement is not pursued further in this paper. See Gately (1984) and Panayotou (1979) who analyze cases of international commodity cartels.

Equations (1) and (3) also assume that no new producers enter (or leave) the market when the price of the commodity increases (or falls). The inclusion of such an effect would, of course, increase the country-specific elasticity of demand for the product.

Equation (4) measures the change in exports that would result if the country in question adopted country optimal export taxes. It is derived from the definition of the elasticity of supply and from the fact that exporters receive a price net of export duties equal to Pk (1 - tk).

It is easy to transform the optimal export duty formula to take into account the above-mentioned distortions. It can be shown that if the factors of production released by the taxed activity have a social return which is a fraction α of the social return obtained in the taxed activity, then the optimal export duty formula becomes

For a similar approach to estimating optimal export taxes see Tolley, Thomas, and Wong (1982) who estimate optimal export taxes for Thailand’s rice and Repetto (1972) who studies the taxation of jute in Bangladesh.

Note that, strictly speaking, the country optimal export duty should be compared against the marginal tax rates on exports. No information is available on the latter. However, it is generally safe to assume that the marginal export tax rate is higher than the average, so that the comparison in Table 1 underestimates the extent of the overtaxation of exports.

A word of caution is needed here. The effect of the export duty on the supply of exports and on the supply of foreign exchange should not be taken as a measure of the effect of the tax on economic welfare. A more appropriate measure of the effect of the tax on economic welfare is derived from the consumer and producer surpluses and would be given by

where MCki is the marginal social cost of producing commodity k, MRki is the marginal social revenue derived from exporting k, and dXki is the change in output induced by the export duty relative to the level that would prevail in the country optimal situation.

Other circumstantial evidence supporting the above conclusion is substantial. For instance, Ghana has overtaxed exports of cocoa to such an extent that its ranking among producer countries has slipped from first to third place (after Côte d’Ivoire and Brazil). Haiti has also suffered a decline in coffee exports from three fourths to one half of total output over the last twenty-five years. Production has remained stagnant, and consumption has increased substantially. The export duty was reduced to 25 percent in 1983 from a high of 40 percent, but no effect has been felt in production yet. See Tanzi (1976), who deals with coffee in Haiti, and Okonkwo (1978), who studies cocoa in West Africa.

Multiple exchange rate practices, for instance, are an implicit form of export taxation that does not yield revenue. In many instances, it might be feasible to eliminate multiple currency practices and keep the explicit ad valorem level of taxation constant; this would certainly increase the yield of the export tax.

For instance, the increase in the price of the taxed commodity induced by an increase in the export duty will tend to increase the price of the close substitutes. These higher prices of substitutes counteract the own-price effect. As can be seen, the effect on the price of complements will also tend to counteract the own-price effect.

In the case of commodities handled by state-controlled marketing boards, the reduction in the tax burden implicit in their operations may hamper their role, albeit limited (see section on “Impact of Stabilization Schemes”), in stabilizing prices paid to producers and their incomes.

GECAMINES exports 95 percent of the copper and 85 percent of the cobalt—the two most important mineral exports from Zaïre.

See Behrman (1977) who estimates the benefits and the distribution of the stabilization program proposed by the Fourth United Nations Conference on Trade and Development, and Baldwin (1983) who estimates the stabilization effect of the tin agreement.

It does not take into account the impact of the STABEX, the scheme to stabilize export earnings between the EC and the ACP (African, Caribbean, and Pacific) countries because the compensation under the scheme, which is in the form of grants for most of the countries covered here, accrues directly to the budget and not to the stabilization fund or to producers.

See Golub and Finger (1979) who discuss the impact of protectionism and taxation on the world commodity market.

A major exception is Ethiopia, where the sliding rate applies to the volume of export. Mauritius and Senegal apply a dual rate (a variant of sliding rate) under which the lower rate applies to small-scale producers in the former and to small shipments in the latter.

World Bank (1982, p. 48).

NPCs do not, however, incorporate the impact of subsidies on inputs, such as fertilizers, seeds, insecticides, water, fuel, transport, storage, and farm machinery, which are extended to producers in various forms, including the exemption from relevant taxes (import and excise duties, sales tax, etc.), fixed prices which do not fully reflect the cost, and preferential interest rates on loans to producers.

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