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The welfare impact in Nigeria of the Common External Tariff of the Economic Community of West African States: A distributional effects analysis Olayinka.

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Presentation on theme: "The welfare impact in Nigeria of the Common External Tariff of the Economic Community of West African States: A distributional effects analysis Olayinka."— Presentation transcript:

1 The welfare impact in Nigeria of the Common External Tariff of the Economic Community of West African States: A distributional effects analysis Olayinka Idowu Kareem Cooperating Policy Maker: Mr. Suleman A. AUDU UNCTAD Virtual Institute Seminar on Trade and Poverty International Seminar September 2014

2 Presentation Outline The Context - Introduction - Background
Methodology - The models - Data sources Research findings Conclusion Limitation and Future Research Areas Policy Recommendations

3 CONTEXT: Introduction
Opportunities and risks. - Nigeria’s integration into global markets. Nigerian economy - continuous growth averaging 7% over the past 5 years - the growth has not trickled down. Poverty profile - Share of the population living below poverty line rise from 54% in 1986 to 68% in 2010 (World Bank, 2014). Unemployment rate reached 24% in 2011 (NBS, 2012). Reinforcing Nigeria’s status as a rich country with many poor people. Explaining this phenomenon demands a careful analysis of government policies : - including trade-related policies –and their effects.

4 CONTEXT: Introduction Cont.
This study focuses on the trade dimension, and analyse the impact on household welfare; Specifically, the - adoption of the Common External Tariff (CET) of the Economic Community of West African States (ECOWAS). Nigeria, in 2005, adopted the ECOWAS CET - which reduced tariff rates from a high of 150% to a maximum of 50% within the transition period of 2006–2007. The ECOWAS CET has four tariff bands: - 0% for social needs and basic necessities; - 5% for raw materials; - 10% for intermediate goods; and - 20% for finished goods that are not produced locally. However, Nigeria was granted the fifth band - 35% for finished goods manufactured locally.

5 CONTEXT: Introduction Cont.
Simple average tariff on agricultural imports dropped from about 32% in 2000 to 15% in 2010. Tariff on manufactured products fell from 25% in 2000 to 11 per cent in 2010. Therefore, the adoption of CET had implication for households as consumers, producers and wage earners. The welfare impact of this type of trade policy is not unequivocal. Trade policies affect domestic prices and labour income - which in turn have effects on the consumption and production decisions of households.

6 Introduction Cont. Despite the wide range of analysis on the distributional impact of trade liberalization. - only few, if any, ex-post studies examine the distributional effects of the ECOWAS CET on Nigerian households. It is on the basis that this study asks the following questions: - to what extent has the ECOWAS CET affected domestic prices? and - what has been its effect on household welfare? To answer these questions, this study investigates the distributional effects of the ECOWAS CET in Nigeria, by: - examining the pass-through of the CET to domestic prices, and - assessing the effects of price changes on factor income and households’ welfare.

7 CONTEXT: Background Nigeria accounts for more than half of the sub-region’s imports: - 40% agricultural imports in 2009 and 79% in 2011. - 79% and 65% of industrial imports in 2009 and 2011, respectively. These statistics confirm the huge trade impact of Nigeria on the sub-region. Explain its late and reluctant acceptance of the ECOWAS CET.

8 Methodology: The Model
The study follows a three-step approach to measure the impact of ECOWAS CET. - the first step examines the extent to which the CET is transmitted to domestic prices. (4) - second step investigates the linkage between domestic prices and wages - the final analysis combines the effects of price and wage changes on household welfare.

9 Methodology: The data Data on consumer and producer prices across the states from 2006 to 2011 come from the National Bureau of Statistics (NBS). World prices of commodities were sourced from the World Bank’s Commodities Price Data. We use NBS’s 2010 General Household Survey–Panel (Post-Planting), and the 2011 General Household Survey–Panel (Post-Harvest). - the surveys provided information on: expenditure, income, household characteristics, wages, sector of activity, education, and gender. Tariff data were taken from the UNCTAD TRAINS - World Bank World Integrated Trade Solution database. GlobeFeed distance calculator provided the distance.

10 Dependent variable – Log prices
Findings: First Approach Table 1: Tariff pass-through to domestic prices Dependent variable – Log prices Specification 1 Specification 2 Specification 3 Specification 4 Agriculture Constant *** (0.1682) *** (0.1702) *** (0.1674) *** (0.1694) Tariffs 0.7377*** (0.1120) 0.9910*** (0.1152) 0.3694** (0.1534) 0.6570*** (0.1533) World price 0.3133*** (0.0141) 0.2652*** (0.0149) 0.3168*** (0.0140) 0.2687*** (0.0148) Domestic substitute price 0.7565*** (0.0107) 0.7319*** (0.0109) 0.7751*** (0.0113) 0.7503*** (0.0114) Tariff*Distance *** (0.0004) Tariff*Distance squared 5.08e-06*** (1.12e-06) 5.24e-06*** Wald Chi-square (0.0000) Observation 1273 Manufacturing 6.9652*** (0.3145) 7.0759*** (0.3067) 6.9123*** (0.3092) 7.0257*** (0.3029) 2.8358*** (0.2762) 2.4836*** (0.2746) 3.0516*** (0.3023) 2.7305*** (0.3007) *** (0.0385) *** (0.0378) *** (0.0382) *** (0.0377) 0.4909*** (0.0320) 0.4952*** (0.0312) 0.4654*** 0.4737*** (0.0313) *** (0.0008) (0.0007) Tariff*Distance Squared 1.01e-05*** (2.56e-06) 8.04e-06*** (2.55e-06) 262.57 307.64 280.61 320.65 733 Time effects No Yes

11 Findings The results show that CET reduced domestic prices of agricultural. The tariff pass-through to the domestic prices of these goods – is estimated to be 99%. Consumers benefited from the tariff reduction induced by the CET, while the income of producers from the sales of the commodities declined. The manufactured goods’ results show pass-through to be much higher than 100 per cent, which is not plausible. The extreme results may be due to the quality of the data, and are therefore not taken into account in this study. States closer to ports or borders of entry benefited more from tariff reductions because of lower transaction costs. - e.g. Lagos, Rivers, Yobe and Borno

12 Nigeria’s Porous Borders


14 Dependent variable – Log wage
Findings: Second Approach Table 2: Wage-price elasticities Variable Dependent variable – Log wage 1 2 Constant 6.4145*** (0.3075) 6.6170*** (0.3471) Manufacturing price skilled 0.0150 (0.0329) 0.0017 (0.0323) Manufacturing price unskilled 0.0095 (0.0366) 0.0119 (0.0360) Agriculture price skilled (0.0151) (0.0149) Agricultureprice unskilled 0.0065 (0.0168) 0.0139 (0.0165) Wald Chi-square 481.74 (0.0000) 546.87 Observation 8780 The estimates of price – wage nexus show that there is no significant relationship - indicating that the nexus is not established in this study.

15 Findings: Third Approach – Welfare Impact
Figure 1: Changes in real income

16 Findings Cont. CET has had overall net positive effects on households largely due to the gains from expenditure which outweighed the losses in the households' income. The welfare effects varied across households with different income levels The poorest households experienced higher welfare gains due to the high share of agricultural products in their expenditure. Richer households benefited relatively less because of the lower share of agricultural products in their total expenditure.

17 Conclusion The CET has reduced domestic agricultural goods’ prices.
We did not find a significant link between wages and prices. Overall, the CET has had a net positive effect on households in Nigeria. Households whose income depends largely on activities in the agricultural sector, specifically commodity sales, have seen a depletion of their purchasing power.

18 Limitation and Future Research Focus
Difficulties in obtaining farm gate/producer prices. Quality of the manufacturing goods’ data. Constraints in commodity selection. Focus of impact analysis – price and labour returns. Areas for future research engagement: - extend to employment, agricultural output and investment effects.

19 Policy recommendations
The capacity of producers should be enhanced - through an informed, integrated, and inclusive policy that would stimulate productivity and value addition. Government should boost allocation to the agricultural sector of the economy - by taking steps to improve infrastructure, access to finance, provision of education, etc. The National Poverty Eradication Programme, the National Directorate of Employment’s Programme, the Subsidy Reinvestment and Empowerment Programme, and other relevant government programmes should be strengthened to create jobs and wealth in agriculture.

20 Policy recommendations Cont.
Social safety nets and security measures should also be put in place - at the rural level, especially for vulnerable populations, in order to mitigate these negative income effects. Finally, efforts should be made to reduce the number of banned products; - such import bans may tend to encourage smuggling, given that some of the banned goods are in demand because of limited domestic production - ends up resulting in a proliferation of illegal and informal importation.

21 Smuggling Activities in Nigeria

22 Smuggling Activities in Nigeria Cont.

23 Many thanks.

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