OPTIMAL EXPORT TAXES IN COCOA PRODUCING COUNTRIES
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1 5 November 2007 Original: ENGLISH Distr: RESTRICTED CONSULTATIVE BOARD ON THE WORLD COCOA ECONOMY Fifteenth meeting ICCO Offices, London, Monday 14 January 2008 at a.m. OPTIMAL EXPORT TAXES IN COCOA PRODUCING COUNTRIES
2 Page 1 EXECUTIVE SUMMARY 1. Cocoa exporting countries enjoying a large share of the world cocoa market might see an increase in their export revenues by raising the rate of their export taxes. Specifically, if a cocoa exporting country is facing an inelastic import demand, then an increase in the rate of export taxes might raise export income. However, it is of crucial importance to determine the export tax rate maximizing the national income from the commodity (i.e. producers profit plus governments tax revenue): the optimal export tax. If the tax rate is below the optimal rate, the exporting country fails to exert its market power in the international market. However, if such a rate is too high, the exporting country might lose world market share and hence export revenue. Furthermore, a prohibitive tax rate might encourage smuggling and corruption. As a result, for those countries enjoying a significant share in the world cocoa market, it is very important to determine the optimal rate for the export tax. 2. Cocoa is a tropical crop whose production is concentrated in a handful of tropical countries. Currently, Côte d Ivoire, Ghana, Indonesia, Nigeria and Cameroon account for more than 90% of world exports. In a concentrated world commodity market, the so called adding-up problem is likely to be observed: the simultaneous expansion of exports by a few major cocoa producing countries leading to a substantial decline in world cocoa prices. 3. Some reports from the World Bank have dealt with the issue of the adding-up problem in Sub-Saharan cocoa producing countries. They suggested the imposition of an optimal export tax as a possible trade measure to avoid the progressive decline of world cocoa prices, and, consequently, the income derived from cocoa in these countries. 4. The Secretariat reviewed the optimal export tax issue in the major cocoa exporting countries. It carried out an ad hoc econometric exercise to estimate the price elasticities of the export supply of the major cocoa exporting countries as well the price elasticities of world export demand faced by these countries. Results suggest that optimal export taxes for the major cocoa exporting countries are 34% for Côte d Ivoire, 16% for Ghana, 15% for Indonesia, and four per cent for both Cameroon and Nigeria.
3 Page 2 OPTIMAL EXPORT TAXES IN COCOA PRODUCING COUNTRIES INTRODUCTION 1. In accordance with the Secretariat work programme for the 2007/2008 cocoa year, outlined in document EX/134/9/Rev.1, the present document contains a study on the concept and analysis of optimal export taxes in cocoa producing countries. The specific objectives are: a. to describe the phenomenon of an export tax and its economic impact on an exporting country; b. to highlight the rationale for an optimal export tax in world commodity markets with a high geographical concentration of exports; c. to review previous studies on optimal export taxes in the world cocoa economy; and d. to make an updated estimate of an optimal export tax for the major cocoa exporting countries. A COMMODITY EXPORT TAX 2. A commodity export tax is a levy applied by an exporting country to a commodity as it leaves the domestic market on its way to export markets. It can be applied as an ad valorem tax, set at a certain percentage of the export price, or as a specific tax, set at a fixed amount to pay per unit of product (a fixed amount per tonne, for example). 3. The implementation of an export tax creates a wedge between international and domestic prices by lowering domestic prices. The lower domestic prices in turn depress the levels of exports and hence the revenue of domestic producers. Consequently, government tax revenue is generated at the expense of domestic producers. The imposition of an export tax, however, entails two additional costs. Firstly, as a result of the lower export volumes, the domestic industry involved in the physical handling of the commodity will suffer economic losses. Secondly, foreign exchange earnings for the exporting country will be lower than otherwise would be the case, unless export demand is highly price inelastic. 4. Currently, it is estimated that about one third of WTO Member countries apply export taxes. In general, for less developed countries (LDCs) export taxes are a main source of government revenue. Export taxes have the advantage of being straightforward to administer, as they do not require any particular monitoring or enforcing mechanism. THE OPTIMAL EXPORT TAX 5. In a world commodity market with a high geographical concentration, restrictions of exports by the major cocoa exporting countries would lead to a solid increase in world cocoa prices. On the other hand, expansion of the exports of such countries would lead to a substantial decline in world market prices for cocoa; this latter situation is referred to as the adding-up problem. Both phenomena are
4 Page 3 directly related and indicate that the major exporting countries in such markets have a degree of monopoly in international commodity markets. 6. Economic theory suggests that the countries which are in such a position can maximize their income from the commodity (i.e. producers profit plus governments tax revenue) through the application of an optimal export tax. The adjective optimal emphasizes the fact that the optimal rate generates tax revenue high enough to compensate the loss faced by domestic producers and, at the same time, to contribute to the country s fiscal budget. For any exporting country i, the optimal tax rate is calculated as follows: τ i = j i si s γ j j η i whereτ i is the optimal export tax rate for the exporting country i; s i is its share in the world market; j i s γ can be interpreted as the price elasticity of the exports from the rest of the world, excluding j j country i; and η i is the price elasticity of world export demand faced by country i for such a commodity. PREVIOUS STUDIES ON OPTIMAL EXPORT TAXES FOR COCOA 7. Cocoa is a tropical crop whose production is concentrated in a handful of tropical countries between the 20 north and 20 south parallels. Currently, Côte d Ivoire and Ghana account for about two thirds of world exports, while the share of the five largest exporting countries Côte d Ivoire, Ghana, plus Indonesia, Nigeria and Cameroon accounts for more than 90% of world exports. The large concentration of cocoa exports suggests that these countries possess a degree of monopoly power in the world cocoa market. As a result, these countries can maximize their incomes from cocoa by imposing optimal export taxes. 8. The World Bank has addressed the issue of optimal export taxes in cocoa producing countries in two major research reports: Akiyama [1992] and Akiyama and Larson [1994]. Akiyama [1992] provided a comprehensive overview of the policy implications of optimal export taxes in the case of perennial crops such as cocoa. The focus of his study was on an optimal export tax for cocoa in Ghana. The results of his study suggested that the optimal export tax in Ghana should be lower than the export tax prevalent at that time, which was estimated at thirty per cent. 9. Akiyama and Larson [1994] assessed the optimal export tax for many Sub-Saharan commodity producing countries. They noticed that many Sub-Saharan exporting countries operated in concentrated world commodity markets: cocoa, coffee, cotton, sugar and tea. Consequently, the adding-up problem in these commodity markets was very likely to be observed: a simultaneous expansion of exports in a few countries would lead to a substantial decline in world market prices. Against this background, Akiyama and Larson assessed optimal export taxes across the major exporting countries for cocoa, coffee, cotton and tea. However, their analysis was not based on econometric estimates of export supply and demand, but rather on informed guesses about these parameters. With regard to cocoa, the authors assumed that the long-run price elasticity of world export demand for cocoa was -0.40, while the long-run price elasticity of export supply of the major [1]
5 Page 4 cocoa producing countries in the Sub-Saharan region was estimated at According to these informed guesses and historical world market shares, Akiyama and Larson calculated that the optimal export tax in Côte d Ivoire was 28.9%; in Ghana 9.3%; in Nigeria 5.2%; and in Cameroon 4.0%. ICCO SECRETARIAT ESTIMATES OF THE OPTIMAL EXPORT TAX 10. The assessment of optimal export taxes requires estimates of both export demand faced by the major cocoa exporting countries as well as their export supplies. The ICCO Secretariat carried out an ad hoc econometric exercise using two major assumptions. Firstly, it was assumed that exports were equal to domestic production. Secondly, owing to a lack of reliable data, ICCO world market prices were used as a proxy of cocoa producing countries f.o.b. prices. ICCO prices are calculated as the average of the nearest three active future trading months on the London International Financial Futures and Options Exchange (LIFFE) and on the New York Board of Trade (NYBOT). It is worth noting that LIFFE quotes the average cocoa f.o.b. prices in West Africa, while NYBOT quotes the average cocoa f.o.b. prices in Latin America. 11. Under these assumptions, price elasticities of export demand were estimated using cointegration. This analysis technique is preferred to others, as it addresses the issues of simultaneity of prices and exports as well as the non-stationary nature of data. Table 1 summarizes the estimated longrun price and income elasticities of cocoa export demand faced by the five major cocoa producing countries. 12. Price elasticities of export supply were estimated using co-integration for the reasons discussed earlier. Alternatively, if a co-integrating relationship was not found, ordinary least squares were used. Table 2 summarizes the estimated long-run price elasticities of the cocoa export supplies in the major cocoa producing countries. 13. Table 3 presents the optimal export taxes in the five major cocoa producing countries as estimated by the ICCO Secretariat. These estimates have been calculated using equation [1] and employing the estimated parameters outlined in Tables 1 and 2. According to these estimates, the optimal export tax is 34% in Côte d Ivoire; 16% in Ghana; 11% in Indonesia; four per cent in Cameroon; and four per cent in Nigeria. 14. Table 4 compares the optimal export taxes estimated by the Secretariat and the ones obtained using Akiyama and Larson s price elasticities of demand (i.e. -0.4) and supply (i.e ). It is worth noting that both sets of optimal export taxes for cocoa have been calculated using the average shares of net exports observed from 2003/2004 to 2005/2006. According to Akiyama and Larson s parameters, the optimal export tax is 47% in Côte d Ivoire; 19% in Ghana; four per cent in Cameroon; and five per cent in Nigeria.
6 Page 5 CONCLUDING REMARKS 15. Two key important lessons can be drawn from this study. The first is that the data required to estimate the optimal export taxes in cocoa exporting countries are not readily available. This makes it difficult to accurately estimate the optimal export taxes. Hence the estimates presented above should be taken as indicating the order of magnitude of the optimal export taxes. 16. The second lesson is that the major cocoa exporting countries have to recognize their policy interdependence because of the adding-up problem. As a result, if a major exporting country applied an export tax, the benefits from increased world prices would be shared with all remaining countries, even though the latter would not impose any export taxes. Similarly, the uncontrolled expansion of exports by a major player would lead to a decline of world market prices for cocoa, reducing the export revenue of all other cocoa exporting countries.
7 Page 6 TABLES Table 1. Estimates of price and income elasticities of world cocoa export demand faced by the major cocoa exporting countries Country Share of net Long-run price Long-run income exports ** elasticity elasticity Côte d Ivoire 43% Ghana 21% Cameroon 6% Nigeria 6% Indonesia 15% World w 100% ** The average share of net exports of cocoa from 2003/2004 to 2005/2006. w Price and income elasticities for the World have been calculated as weighted average of the estimated elasticities of the five major cocoa exporting countries. Table 2. Estimates of price elasticities of net cocoa export across the major cocoa producing countries Country Share of net exports ** Long-run price elasticity of supply Brazil 2% 0.67 Cameroon 6% 0.60 Côte d Ivoire 43% 0.58 Dominican Republic 1% 0.42 * Ecuador 4% 0.83 Ghana 21% 0.64 Indonesia 15% 0.37 Malaysia 0% 0.51 Nigeria 6% 0.22 * World 100% 0.55 w w Weighted average of price elasticities of export supply of the major cocoa producing countries where weights are the shares of net exports ** The average share of net exports of cocoa from 2003/2004 to 2005/2006. Co-integration including a trend variable Co-integration * Ordinary Least Square
8 Page 7 Table 3. Estimates of the optimal cocoa export tax for the major cocoa exporting countries Country Share of net exports ** Optimal export tax Côte d Ivoire 43% 34% Ghana 21% 16% Cameroon 6% 4% Nigeria 6% 4% Indonesia 15% 11% ** The average share of cocoa net exports from 2003/2004 to 2005/2006. Table 4. Comparison between the ICCO Secretariat and Akiyama and Larson s estimates of optimal export tax in the major cocoa exporting countries Country Share of net Secretariat Akiyama and exports ** estimates Larson estimates Côte d Ivoire 43% 34% 47% Ghana 21% 16% 19% Cameroon 6% 4% 4% Nigeria 6% 4% 5% Indonesia 15% 11% n.a. ** The average share of cocoa net exports from 2003/2004 to 2005/2006. References Akiyama, T.(1992). Is there a case for an optimal export tax on perennial crop. Policy Research Working Paper WPS 854. Akiyama, T. and Larson, D.F. (1994). The adding-up problem. Strategies for primary commodity exports in Sub-Saharan Africa. Policy Research Working Paper No.1245.
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