Abstract

Based on six detailed case studies, this section expands the analysis of trade reform in Fund-supported programs to cover a longer time period, to include the design and negotiation stages of programs, and to examine more closely the factors influencing program design and implementation. Its objectives are to analyze (1) the trade reform effort over a seven-year period, both within and outside the context of Fund-supported programs; (2) the evolution of program targets and the influence of different factors, particularly fiscal considerations, on program design; (3) the implementation of trade reforms and the factors contributing to or inhibiting the implementation of these reforms; and (4) the elements that may have contributed to successful trade liberalization and the lessons that can be drawn.

Based on six detailed case studies, this section expands the analysis of trade reform in Fund-supported programs to cover a longer time period, to include the design and negotiation stages of programs, and to examine more closely the factors influencing program design and implementation. Its objectives are to analyze (1) the trade reform effort over a seven-year period, both within and outside the context of Fund-supported programs; (2) the evolution of program targets and the influence of different factors, particularly fiscal considerations, on program design; (3) the implementation of trade reforms and the factors contributing to or inhibiting the implementation of these reforms; and (4) the elements that may have contributed to successful trade liberalization and the lessons that can be drawn.

The six countries covered by the case studies, Bangladesh, Egypt, Hungary, Sri Lanka, Zambia, and Zimbabwe, were selected from the review in Section III. The selection criteria aimed at a sample that would reflect different trade liberalization outcomes and strong or weak trade policy program content.40 Account was also taken of other factors such as the availability of information on the trade regimes and geographic diversity. According to the review in Section III, Hungary, Sri Lanka, and Zambia are examples of countries with reasonably strong trade programs that were successfully implemented. Zimbabwe also had a strong program, but implementation was less successful. Bangladesh and Egypt, in the period under review, had less ambitious programs relative to the initial degree of restrictiveness. Trade reform efforts were examined during the entire 1990–96 period. Programs that started in the late 1980s and those currently under way and not yet concluded were also incorporated if they were an integral part of the trade reform process.41

The case studies indicate that (1) reviewing the extent of trade reform during 1990–96, rather than in one medium-term arrangement, did not generally reveal significantly more trade liberalization; (2) program targets were scaled down in the design and negotiation stages in about half of the programs; (3) virtually all trade liberalization in the case study countries in the 1990s occurred in the context of Fund programs; (4) fiscal concerns were the main factor cited during the design stage for limiting the scope of trade reform targets, but available indicators of fiscal conditions, and evidence that fiscally more neutral trade policies may have been available, do not readily support these concerns; (5) cooperation and coordination with the World Bank was important; (6) RTAs could influence program design; and (7) quantifiable and preannounced medium-term targets could be important in program implementation.

The following subsections start with an overview of trade liberalization efforts in the case study countries. This is followed by sections on the design and negotiation of trade reform measures and their implementation. Finally, some lessons are drawn from successful programs.

Trade Liberalization in the 1990s

As measured by the index used in this study, all six countries liberalized trade during the 1990–96 period, although to varying degrees (Table 5). Most started the 1990s with relatively restrictive trade regimes. Four were classified initially as 10 on the index of restrictiveness (Figure 9). The most significant trade liberalization was achieved by the two countries (Sri Lanka and Zambia) that did not initially have highly restrictive regimes; both moved from moderate (7) to open categories (2 and 3, respectively) over the seven-year period. Bangladesh and Hungary also achieved significant liberalization, moving from the most restrictive classification (10) to the moderate category (7 and 6, respectively), and Egypt and Zimbabwe moved from an index classification of 10 to 8.

Table 5.

Targeted Trade Reform in Fund Programs for Case Study Countries

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Source: IMF staff estimates.

Program covered in the review (Section III).

Foreseen in 1998.

Outcome as of the end of 1996.

In the case study, these programs were analyzed separately, because they were designed and negotiated at different times, although the trade policy content of these programs was very similar.

Figure 9.
Figure 9.

Case Study Countries: Ratings of Trade Regime Restrictiveness

Source: IMF staff estimates.

Fund programs played an important role in the trade liberalization achieved in the 1990s. Twelve of the 16 programs with the case study countries during the period included specific trade liberalization targets. As shown in Table 6, virtually all of the changes in trade restrictiveness during the 1990s took place in the context of Fund-supported programs. The change in trade restrictiveness, as measured by the index, varied from a 2-point to a 5-point movement over a seven-year period. All six countries reduced NTBs. All but Egypt and Zimbabwe reduced average tariffs sufficiently to move by one or more categories.

Table 6.

Changes in Trade Restrictiveness Ratings in Case Study Countries During the 1990s

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Source: IMF staff estimates.

The case studies show that the programs reviewed in Section III captured most of the trade liberalization achieved during 1990–96 in these countries. Changes in the restrictiveness rating were identical in four countries (Egypt, Hungary, Sri Lanka, and Zimbabwe) despite the longer period of analysis. Two countries (Bangladesh and Zambia) implemented further reductions in the overall restrictiveness of the trade regime. Bangladesh’s 1990 ESAF-supported program targeted moderate movement in overall trade restrictiveness; the subsequent 1993 program monitored under enhanced surveillance did not target additional quantifiable trade liberalization. Hungary’s 1991 EFF program included ambitious reduction in NTBs, yet the subsequent programs did not make significant further progress, as measured by the index, toward an open trade regime. Egypt’s 1993 EFF sought to build upon trade reform in the preceding Fund-supported program. It included far-reaching, medium-term trade policy targets in the context of an ambitious program. However, the program as a whole went off track, and trade reform efforts stalled until the 1996 Stand-By Arrangement, which again incorporated far-reaching trade reform efforts, including a number of important prior actions.42

Evolution of Program Targets During the Design and Negotiation Stages

This section assesses how trade reform targets evolved and how different trade-related factors influenced program design.

Evolution of Targets

The case studies attempted to determine the extent to which trade reform objectives were diluted before agreement on a program was reached. Analysis of the process of program design and negotiation is complicated because much of the ebb and flow of the discussions is informal and undocumented. This is particularly true of political economy considerations. Nevertheless, the available information indicates that in about half of the 16 programs covered by the case studies, the extent of trade reform initially proposed was scaled back43 during the design and negotiation stages.

Available information shows that changes in the extent of trade reform targeted in programs during the design and negotiation stages took place mostly in the more ambitious programs. In five of the seven cases in which the final targeted change in restrictiveness of a program was 3 points or greater, the initial design stages envisaged even more extensive liberalization. In programs with less far-reaching targets, there is less evidence of a scaling back of an initially more ambitious program design. While this finding could be interpreted in various ways, it may indicate more give and take in cases where the authorities were more resolute in their commitment to more rapid trade reform. It may also suggest that the extent of resistance increases directly with the extent of liberalization targeted.

Factors Influencing Design and Negotiation of Trade Reform

The design and negotiation of trade reform in the case study programs were influenced by fiscal and balance of payments considerations, the World Bank, the WTO, RTAs, and unemployment and adjustment cost concerns.

Fiscal Considerations

During 1990–96, fiscal issues were cited in at least one program in five44 of the six case study countries and were among the main reasons given for lowering program trade reform targets during the design and negotiation stages (Table 7). As noted earlier, the fiscal impact of trade reform depends on the specific elements of the program and the initial circumstances of the country concerned. The following will analyze whether the fiscal situation in the countries citing fiscal concerns was severe enough to justify caution and whether program design included more potentially revenue-enhancing measures, such as tariffication of NTBs and curtailment of exemptions, and measures to broaden the tax base. The analysis is intended to shed some light on the links between trade reform and fiscal concerns, rather than as a full analysis of the fiscal impact of trade reform.

Table 7.

Factors Cited as Influencing Trade Reform for Case Study Countries

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Source: IMF staff estimates.Note: D = cited during the design stage of programs; I = cited during the implementation stage of programs.

In any Fund program, raising additional revenue to help close a deficit by even a point or so of GDP is always difficult. It is therefore not surprising that fiscal policy concerns are frequently cited as a reason for delaying trade reform, and that delays or even reversals in tariff reductions are made in response to revenue shortfall problems. In several of the case studies, fiscal problems were cited as reasons for slower trade reform. But to say that trade reform was slowed because of fiscal concerns is not to say it needed to be slowed because of fiscal concerns. In the case studies where such references were made, little detailed evidence supported these concerns. There was no evidence of arguments being made as to why revenue-neutral measures such as widening the tax and tariff base could not be implemented.45 Consider some of the case studies.46 Bangladesh and Zambia were the only cases in which most of the indicators pointed to some fiscal constraints (Tables 8 and 9).47 Bangladesh lacked a VAT, had a high dependency on trade taxes, and had a ratio of low revenue to GDP. Fiscal concerns appear to have been accepted as a constraint to more rapid trade reform in the 1990 program. While average tariffs were reduced, some were increased, and NTB removal was relatively gradual. Many of the indicators for Zambia also point to difficult fiscal circumstances, notably a high dependence on trade taxes, a large fiscal deficit reduction target, and an absence of broad-based consumption taxes. In Zambia, the design of trade reform focused initially on substantial NTB reductions with tariff reform undertaken subsequently as revenues from other sources materialized. In Egypt, Hungary, and Zimbabwe, the targeted reductions in the fiscal deficit were high, but revenue collection was moderate to high and dependence on trade taxes for revenue moderate. In these cases, the fiscal constraints on trade reform appear less stringent. In Zimbabwe, the authorities’ fiscal concerns appear to have led to slower NTB removal than initially foreseen, although the linkage is unclear. In Egypt, tariffs were increased for fiscal reasons in 1991, while in Hungary the removal of an import surcharge was slowed down,48 compared with the initial proposal of the IMF staff, also because of fiscal reasons.

Table 8.

Fiscal Indicators in Countries Where Fiscal Factors Were Cited as Influencing Program Design1

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Source: IMF staff estimates.

Depending on the time of negotiations, fiscal indicators are from the program year or the preceding year.

Share of trade taxes in total tax revenue. High ≥ 30 percent; Medium = 10-30 percent; Low ≤ 10 percent.

Share of tax revenue in GDP. High ≥ 20 percent; Medium = 10-20 percent; Low ≤ 10 percent.

Change in percent of GDP over a three-year period. High > 4 percent; Low < 2.

Extent of exemptions is measured taking into account the ratio of average tariffs collected to average statutory rates.

Table 9.

Case Study Fiscal and Balance of Payments Information

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Source: IMF staff estimates.

The definition of a VAT varies from country to country.

Efforts to address fiscal concerns by designing and sequencing trade reform in a more revenue-neutral way and accompanying it with complementary fiscal measures varied. In Bangladesh, the initial program, while reducing average tariffs, targeted only limited NTB removal, few reductions in exemptions, and only some compensatory revenue measures (Table 10). Whether more could have been done to broaden the trade reform in a revenue-neutral manner is hard to assess. Bangladesh’s low collection rates for tariff revenue compared with statutory tariff rates49 suggest that program design could have paid more attention to exemptions. Furthermore, a faster pace of removing import NTBs might have had a positive revenue impact.50

Table 10.

Existence of Policies to Reduce Fiscal Impact of Trade Reform in Programs Citing Fiscal Concerns

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Source: IMF staff estimates.

Increase (+) or decrease (-); n.a. denotes not applicable.

In Zambia, as noted above, fiscal concerns led to an early focus on NTB removal rather than reduced tariff protection. At the same time, measures were initiated to diversify the revenue base, including reduced exemptions and discretionary waivers from import taxes, increased sales taxes on domestic goods, and a conversion of the sales tax to a VAT in 1995. These actions effectively paved the way for future tariff reform. In Zimbabwe, trade reform focused largely on liberalization of import licensing related to foreign exchange restrictions and gradual elimination of a 20 percent import surcharge. The fiscal impact of the tariff reform was to be reduced by increasing minimum tariffs and reducing exemptions. However, the program did not foresee introduction of a VAT or other measures to diversify the revenue base.

In Hungary, the phasing out of the import surcharge within the context of the 1996 Stand-By Arrangement was slowed because of fiscal concerns. The program did contain measures to reduce exemptions and diversify the revenue base. However, fiscal concerns could have been further alleviated by the tariffication of import NTBs. In Egypt, tariffs were increased for fiscal revenue reasons in 1991, but only modest targets were set for the replacement of some NTBs by tariffs. A broad-based sales tax was introduced in the program, which was planned later to lead to a VAT. Furthermore, a greater reduction in exemptions from import duties could have been attempted.51

While the fiscal impact of trade reform is an important concern of policymakers, the above discussion suggests that in some cases the programs could have targeted more far-reaching trade reform had more attention been given to supporting fiscal policies and to revenue-neutral trade measures. Zambia’s ambitious trade reform was the only one that relied on NTB removal and substantial fiscal broadening as a prelude to reducing tariff protection. Also, difficult fiscal circumstances did not prevent Sri Lanka from pursuing ambitious trade reform. The experience of Sri Lanka incidentally also highlights the importance of comprehensive, well-specified medium-term targets for trade reform as part of an overall medium-term policy framework to ensure that supporting measures are implemented, including early provision of appropriate technical assistance.

Balance of Payments

Balance of payments conditions were cited as having affected the formulation of the trade content of Fund-supported programs in Bangladesh, Egypt, and Hungary. In all three countries, it resulted in slower trade reform than initially envisaged. The balance of payments position and its components are determined by a variety of factors other than trade policies, including notably exchange rate, fiscal, and monetary policies. The severity of a country’s balance of payments situation depends on these (and other) factors, and whether the balance of payments situation justifies slower trade reform is difficult to judge.52

In Bangladesh (ESAF, 1990), the authorities feared that faster reform could deplete foreign exchange reserves. A previous lifting of trade restrictions was believed to have contributed to a depletion of international reserves. Together with fiscal concerns discussed above, these concerns may have influenced the pace and nature of Bangladesh’s initial trade reform, which included modest QR removal and tariff reform. It was nevertheless noted at the time that the main cause of the current account deficit was expansionary monetary policies. The lack of trade reform in Hungary’s 1990 Stand-By Arrangement reflected caution with import liberalization because of concerns about the impact of external disequilibria on creditworthiness.

Whether these concerns were justified is again a difficult question to answer. In all three countries, current account deficits were moderate or high at the start of the programs, while reserves were clearly low only in Bangladesh. In any event, if these concerns were legitimate, there are as noted ways to deal with balance of payments problems other than by imposing trade restrictions. In general, Fund-supported adjustment programs provide (temporary) access to Fund resources in support of appropriate macroeconomic and structural policies designed to address the fundamental causes of external imbalances.

World Bank

IMF collaboration with the World Bank in the trade policy area was cited in all six case studies as having influenced the design of trade reform. Based on information available in the case studies, the two institutions appear to have generally complemented each other and there were no instances of significant differences in views or approach. In some cases (Egypt (Stand-By Arrangement, 1991), Sri Lanka (ESAF), and Zambia (RAP, 1991, RAP, 1992)), it was the Bank that took the lead in the design of trade reform, while in one other case (Egypt’s Stand-By Arrangement, 1996), the cooperation worked the other way around.

World Trade Organization

Commitments to WTO (or its predecessor the GATT) were significant in only one case study. During formulation of the 1996 Stand-By Arrangement with Hungary, the authorities argued that further liberalization of tariffs and the removal of certain NTBs should be limited to its Uruguay Round commitments and that unilateral liberalization in the Fund-supported program might weaken its position in international negotiations; IMF staff acceded to the authorities’ views. Only small reductions in Hungary’s remaining NTBs and tariffs were implemented in 1995–96 as a result of Uruguay Round commitments, because of the slow phase-in of liberalizing textiles and reducing agricultural restrictions under these commitments. On balance, these did not significantly reduce overall trade restrictiveness.53

Regional Trading Arrangements

Regional trading arrangements played a role in two case studies. In Zambia, commitments under the CBI influenced the design of trade policy in the 1995 SAF and ESAF.54 The importance of the initiative and the fact that the Fund and Bank were cosponsors meant that in practice the CBI tended to define the extent of trade liberalization targeted and its timetable. The CBI had a positive influence, as its targets represent substantial trade reform in the regional context.55 Hungary’s strategy has been to pursue liberalization in the context of RTAs—mainly Europe and Central European Free Trade Agreements (CEFTA). While participation in RTAs has led to trade liberalization in Hungary in the regional context, discriminatory (non-MFN) trade liberalization may have led to significant trade diversion.

Unemployment and Adjustment Costs

The expected impact on unemployment was cited in two case study countries as affecting the pace and scope of the trade reform. At the time of negotiating Egypt’s 1993 EFF, the authorities favored a more gradual approach to liberalization due to the potential short-run effect on employment at a critical time politically. In 1996, during the preparation of Hungary’s Stand-By Arrangement, the need to protect local industry was also mentioned as a reason for not reducing all the remaining NTBs.

The short-term adjustment costs, including unemployment, are always an important concern in program design. Although the direct impact on unemployment may be large in specific sectors or demographic groups; the net benefits of trade reform exceed the costs of adjustment, and the net employment effects (considering new jobs in other industries) are in general far smaller. Inefficiencies in resource allocation may or may not safeguard jobs temporarily in inefficient industries, but this would be at the expense of long-term growth potential and new employment creation. Further, the expected employment impact varies, and it is often difficult to disentangle the effect of trade liberalization from other sources of structural change that affect employment. The literature on trade reform does not point to any strong evidence of large net labor displacements or policy reversals based on employment concerns with trade liberalization (Papageorgiou, Michaely, and Choksi, 1991). Other sources of structural change, such as technology, are often found to be more important. Costs of adjustment may also be influenced by the pace of trade reform. Mussa (1986) has shown that adjustment costs are not necessarily higher if reforms are more rapid and preannounced. Nevertheless, labor displacement is a legitimate concern for policymakers and may call for designing accompanying policies, such as targeted social safety nets, that address the costs of short-term adjustment to more liberal trade.

The design and implementation of trade reform can also be influenced by many other factors such as the status of labor market reform and a variety of political economy factors (Box 3). Flexible labor markets make movement of labor easier between industries, which reduces costs of adjustment associated with trade reform. Price liberalization is also important to transmit the new price signals from freer trade to producers and consumers. The influence of these factors on the success of trade reform depends on the circumstances of each country and may warrant attention in program design with trade reform. A review of the importance ascribed to these factors in Fund programs, however, did not indicate a consistent link between the success of trade reform and the presence of these factors or of measures to address them.

Factors Influencing Implementation of Trade Reform

The results show that targeted trade reform in Fund programs in the case study countries, as in the review countries, was generally achieved. In the two cases (Egypt and Zimbabwe) where trade policy targets were not met, it was because the overall program went off track and most targets were not met, including trade policy. This section analyzes various factors that were cited as influencing the implementation of trade reform in Fund programs.

Program-Related Factors

The type of conditionality used on trade measures in the programs covered by the case studies is shown in Table 11. Binding monitoring of at least one trade liberalization measure was used in all programs with trade policy content. As would be expected, the strength of conditionality was related to the importance of the measure for the program, and it appears to have facilitated implementation. In three cases, only measures subject to binding conditionality were implemented. In Bangladesh, the main measures constituted prior actions and accounted for much of the liberalization achieved in the program. The program for Sri Lanka also had relatively strong conditionality on trade measures, which may have been an important factor in Sri Lanka’s successful implementation of trade reform. In Zimbabwe, the performance criterion on the liberalization of the import licensing system was implemented, while the nonbinding commitment to reduce tariffs was not. In the other cases, the nature of conditionality does not appear to have been a factor in implementation. Zambia, with less strong conditionality, nevertheless achieved significant liberalization, and the same is true for Hungary’s 1991 EFF program. The latter two case studies would appear to suggest that, while the use of binding conditionality may accompany successful program implementation, a much more important factor was the government’s commitment to trade reform and ownership of the program.

Table 11.

Nature of Trade Conditionality for Case Study Countries

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Source: IMF.

There is some evidence that programs with more specific medium-term targets had better implementation records. Further, the preannouncement of policies may have enhanced their implementation. Policies and targets that are specified and preannounced can reduce adjustment costs by enabling producers and workers to anticipate changes, and may also reduce lobbying for continued protection. In the most ambitious case, Sri Lanka, the program initiated in the late 1980s had specified medium-term trade goals, and the major elements were preannounced by the government. The subsequent ESAF-supported program was an extension of this trade reform effort. This gave a clear framework for the government to pursue its goals.

Other Factors

While important in the design and negotiation stages, notwithstanding the potential short-term fiscal impact, macroeconomic factors were not cited as having had a major impact on trade reform implementation. An exception was Zimbabwe’s 1992 EFF-sup-ported program, where a severe drought affected the economy. As noted above, most of the program targets for trade reform were met in the six-country sample and, where they were not, it was in the context of a general program failure. Only in Bangladesh were fiscal and balance of payments concerns cited when committed trade measures were not all implemented in 1992. Whether this was justified is uncertain. However, it can be noted that the fiscal deficit, including grants, was not very high and it improved during the program period between 1990–92. Moreover, dependence on trade taxes declined, revenue collection improved during the period, and a VAT was introduced during the second program year to diversify revenue collection.

Cooperation with the World Bank was cited in all cases to have had an impact on program implementation. In a number of cases, Bank and Fund programs had closely related conditionality. In Egypt, for example, when implementation of the trade content of the Bank’s Structural Adjustment Loan was delayed, the measures in the Fund’s program were delayed as well. In Bangladesh, trade reform under a Fund program was pursued further under a subsequent Bank program. The fact that virtually all liberalization in the six countries in the 1990s occurred in the context of Fund programs, and many of these were closely coordinated with Bank programs, suggests that Fund-Bank collaboration was important to implementation of trade reform in the countries studied.

Obligations to the GATT/WTO affected implementation in only two programs. Certain WTO rules may constrain implementation of programmed policy actions. In Egypt’s 1991 Stand-By Arrangement, after the first review of the program, it was discovered that increasing some (lower rate) tariffs as programmed (to narrow dispersion and raise revenue) would breach some of Egypt’s GATT bindings. Egypt requested a waiver of its GATT obligations for the tariff increase already implemented, and the programmed plan to continue increasing the lower tariff rates was abandoned. In Zambia, the modalities of levying the surcharge introduced in 1995 outside the Fund program was influenced by WTO rules (increase in duties versus a new tax).56 The relatively few cases in which such inconsistencies arose may reflect the fact that in recent years the IMF staff, during the design stage, has given increased attention to ensuring consistency of program measures with the countries’ GATT/WTO obligations. Similarly, RTAs did not have much impact on the implementation of targeted trade reform.

Lessons from Successful Liberalizers

This section assesses whether any lessons may be learned from the more ambitious and successful liberalizers, such as Sri Lanka and Zambia, and whether they did something different from the other case study countries. The evidence from the case studies is limited, but some cautious conclusions can nevertheless be drawn.

First, reforms in both Sri Lanka and Zambia were a continuation of previous efforts initiated in the late 1980s. This implies that the authorities had already gained the initial political support for liberal trade policies, which is likely to be essential to sustain the reform process. In addition, trade reform seems to have been viewed as a medium-term objective. This was clearly the case in Sri Lanka where the reforms were part of a preannounced package with clear medium-term targets. This gave the right signals to policymakers and private agents, and served as an anchor for adjustment. A medium-term perspective was also evident in the continuity of Zambia’s reform efforts.

A closely related issue is the authorities’ general commitment to expeditious implementation of liberal market-oriented policies, including trade reform. In both countries political commitment to reform was strong. Additional evidence of the importance of ownership and commitment to liberalization can be seen from Hungary’s successful reforms in the early 1990s when trade reforms were implemented despite the overall program going off track.

Successful programs, and especially the Zambia program, were designed in a way to counter fiscal or other concerns raised at the outset. Trade reform initially focused on the removal of NTBs, while potentially revenue-reducing tariff reform was left to a later stage. The initial program was also accompanied by various measures to diversify the revenue base by introducing broader-based taxes and targeting a reduction in exemptions.

Last, the fact that such a substantial proportion of trade reform in the case study countries took place in the context of Fund-supported programs shows the importance of the active involvement of the Fund and the Bank in support of the authorities’ commitment to appropriate adjustment policies.

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