Trade Liberalization and Gains from Uganda s Lint Export

Transcription

1 American Journal of Economics 2015, 5(5): DOI: /j.economics Trade Liberalization and Gains from Uganda s Lint Export T. Odongo Department of Finance, Makerere University Business School Kampala, Uganda and also a Senior Scholar at University of Lusaka, Zambia Abstract This study uses theoretical analysis to explain the link between trade liberalization and gains from Uganda s lint export in the period following liberalization of the cotton industry. The study discovered that Uganda may not necessarily realize gains from trade liberalization and consequently world trade unless cotton is a commodity of her comparative advantage and that she produces it abundantly to supply the world market. In order to realize gains from world trade, the study recommends that Uganda should produce abundantly commodities of her comparative advantage to supply the world market. Keywords Trade Liberalization and Gains from Export 1. Introduction The debate on the role of trade policy reforms to economic development has been central in developing countries for most of the second half of the Twentieth Century. The leading opinion during this period favored import substitution strategy of industrialization (Greenaway, Wyn and Wright, 2002). The rationale behind this opinion was that this strategy would support establishment of locally owned industries to replace the major imports of the time. Trade barriers were considered indispensable safety means through which local industries would be sheltered from wide spread competitions in world trade. Surprisingly, during the 1990s focus of developing countries completely changed in favor of liberalization of international trade and payments (Greenaway, Wyn and Wright, 2002). Trade liberalization was introduced to developing countries as part of the Structural Adjustment Program under International Monetary Fund and World Bank (Balassa, 1983). It became dominant in developing countries and was collectively used with privatization and deregulation policies to promote better management of fiscal and monetary policies (Pineiro, 2006). Trade liberalization may mean elimination of all biases against free trade. These include; removal of import tariffs, import subsidies, export duties, exchange rate control and output price distortion (Thirlwall, 2004). Trade biases together with other trade and payment restrictions reduce the level of transactions and specialization which foster development of import substitution industries; that often fail * Corresponding author: tsodongo@yahoo.com (T. Odongo) Published online at Copyright 2015 Scientific & Academic Publishing. All Rights Reserved to attain degree of efficiency and flexibilities shown by countries exposed to international competition (International Monetary Fund, 1987). There are several measures of trade liberalization in economic literature. Some of such measures include; average import tariff, share of trade to non-tariff barriers, export duties, index of effective protection and relative price distortion (Thirlwall, 2004). In 1992, Government of Uganda embarked on trade liberalization program after about three decades of pursuing import substitution strategy of industrialization. The major reason for this program was to promote export through dismantling of trade barriers. Cotton sub sector was liberalized in 1994, following enactment of Cotton Development Statute to oversee activities within the cotton industry (CDO, 2005). The new environment brought about a number of changes in the cotton industry. Such changes include; dismantling of Lint Marketing Board that had previously monopolized lint export from the country, abolition of union monopoly over cotton export, elimination of licensing of cotton products and other regulatory bodies within the cotton industry, creation of Cotton Development Organization to oversee cotton seed production in the country, increased participation of private sector in the cotton industry and determination of farm gate prices by demand conditions in the world market (CDO, 2008). In the period following liberalization of Uganda s cotton industry, domestic lint export was expected to be stimulated by high and rising international prices (Ssemogere and Kasekende, 1994). In essence, increase in lint relative prices during this period would signal a positive shift in domestic lint supply to the world market (Santos-Paulino and Thirlwall, 2002).

2 American Journal of Economics 2015, 5(5): The performance of lint export from Uganda in the period following trade liberalization is indicated in table 1. This table presents volumes, values, world market price and share of world market price received by Uganda s cotton farmers during this period. The volumes of lint export from Uganda in the period following trade liberalization increased significantly, from 6,095,238 kilograms in 1994/95 to 17,000,000 kilograms in 2008/09. The values of lint export from Uganda during this period increased from United States Dollar 12,800,000 in 1994/95 to United States Dollars 20,400,000 in 2008/09. The share of world market price received by Uganda s cotton farmers increased from 57 percent in 1994/95 to 62 percent in 2008/09. Despite having significant performance in the share of world market price received by Uganda s cotton farmers in the period following trade liberalization, the volumes of lint export from the country fell sharply in the period following 2004/05. The trend of lint export from Uganda in the period Table 1. Volumes of Uganda s Lint Export following Trade Liberalization following trade liberalization is indicated in figure 1. Regardless of improved performance in the trend of lint export from Uganda in the period prior to 2004/05, average growth rate of lint export from the country in the period following trade liberalization surprisingly declined, by 4.18 percent per annum. This performance is indicated in figure 2. Despite the decline in average growth rate of lint export from Uganda in the period following trade liberalization, the growth of domestic lint consumption in the country during this period also declined by 0.33 percent per annum. This performance is indicated in figure 3. The performance of domestic lint consumption presented in figure 3 indicates that the decline in average growth rate of lint export from Uganda in the period following trade liberalization has not been caused by domestic lint consumption but it has rather been caused by other operating factors in the economy. Such factors may include fall in domestic lint demand and consequently export resulting from world demand shocks. 1994/ / / / / / / / / / / / / / /09 Export Volumes (Kilogram) 6,095,238 10,439,394 20,478,495 5,921,788 15,172,619 21,1,791 18,500,000 22,200,000 20,350,000 29,600,000 46,987,500 18,863,637 24,790,000 27,750,000 17,000,000 Export Values (USD) 12,800,000 20,670,000 38,090,000 10,600,000 25,490,000 29,000,000 27,750,000 17,760,000 24,420,000 44,400,000 37,590,000 20,750,000 27,269,000 33,300,000 20,400,000 World Price (USD per Kilogram) Share of World Price (Percentage) ** Source: Cotton Development Organization ( Cotton World Statistics September (2010) (ICAC); ** Projected. Volumes of Lint Export (Kilograms) 50,000,000 40,000,000 30,000,000 20,000,000 10,000, / / / / / / / /09 Source: Author s analysis based on data from table 2. Figure 1. Trend of Uganda s Lint Export following Trade Liberalization

3 460 T. Odongo: Trade Liberalization and Gains from Uganda s Lint Export Growth of Lint Export y = x Growth of Domestic Lint Consumption Source: Author s analysis based on data from table 2. Figure 2. Average Growth Rate of Uganda s Lint Export following Trade Liberalization y = x / / / / / / / /09 Source: Author s analysis based on data from Cotton World Statistics (International Cotton Advisory Committee) September (2010). Figure 3. Average Growth Rate of Uganda s Lint Consumption following Trade Liberalization The performance of lint export from Uganda in the period following trade liberalization may lead to a conclusion that there exist no significant gains from Uganda s lint export in the period following liberalization of the cotton industry. The above performance therefore serves to motivate this study to explore the contribution of trade liberalization on gains from Uganda s lint export in the period following liberalization of the cotton industry. Cotton is one of the several agricultural export crops which are vital to Uganda s economic growth. It is produced in almost all parts of the country and employs a considerable number of households. Uganda cotton is of high premium and it is extremely valued by international consumers (Bakunda, 2005). It is Uganda s fourth largest agricultural foreign exchange earner after coffee, tea and tobacco. It has potential to increase its contributions to the economy through greater foreign exchange earnings, value addition, rural and urban employment creation (Collinson, Kleih and Burnett, 2002). This therefore implies that intervention in the cotton sector is vital for poverty eradication. Since liberalization of Uganda s cotton industry in 1994, no attempt has been made to explain gains from Uganda s lint export following liberalization of the cotton industry. Whereas Bakunda (2005) and Blake, Mckay and Morrissey (2001), attempt to explain the associations between trade liberalization and Uganda s economy, such attempts are too broad and lack focus on specific details regarding gains from Uganda s lint export in the period following liberalization of the cotton industry. 2. Theoretical Link between Trade Liberalization and Gains from Uganda s Lint Export The classical theory of comparative advantage can be used to explain theoretical link between trade liberalization and export performance of agricultural commodities from developing countries. This study uses this theory to explain the link between trade liberalization and gains from Uganda s lint export in the period following liberalization of the cotton industry. Following Heckscher - Ohlin theory of factor endowment, countries are endowed differently and as such have different supply of resources. Owing to differences in endowment, there are differences in comparative advantage among nations. Having differences in comparative advantage among nations are therefore the source of world trade. According to the theory of comparative advantage, developing countries can reap welfare gains from world

4 American Journal of Economics 2015, 5(5): trade by exporting surpluses of what they produce locally (Ricardo, 1817). The welfare gains from world trade indicated by Ricardo refer to trade creation gains that often emanate from free trade (Thirlwall, 2000). Trade liberalization guarantees free trade among nations by removing all obstacles against free trade (Thirlwall, 2004). The liberalization of Uganda s cotton industry therefore guarantees free trade within the cotton industry that consequently enables the country to reap welfare gains emanating from free trade. Bearing in mind the effect of trade liberalization on free trade and the contribution of the theory of comparative advantage to trade creation, it is therefore apparent that policy induced changes on trade barriers as those proposed by trade liberalization explicitly affects comparative advantage (Ssemogerere and Kasekende, 1994). It promotes a shift in incentives, profitability and competitiveness of various sectors of the economy to the most competitive sector given the world price (Akyuz, 2005). In view of the above observation, it can therefore be said that trade liberalization stimulates comparative advantage to promote static gains from world trade. This is because in the period following trade liberalization; resources like capital, land and labor can be reallocated rapidly and without cost from those sectors losing competitiveness to those gaining competitiveness (Townsend, 1999) (Dornbusch, 1992) and (Akyuz, 2005). Static Gains from World Trade Increased Output Increased Export Comparative Advantage Less Competitive Sectors More Competitive Sector Resource Allocation Efficiency (Capital, Land and Labor are Efficiently Allocated) Competitiveness (High and Rising International Prices) Trade Liberalization (Removal of Tariffs, Subsidies, Foreign Exchange Control, Quotas and Output Price Distortion) Source: Author s presentation of theoretical link between Trade Liberalization and Uganda s Lint export performance Figure 4. A simplified representation of Theoretical Link between Trade Liberalization and Gains from Uganda s Lint Export

5 462 T. Odongo: Trade Liberalization and Gains from Uganda s Lint Export Once resource reallocation has been completed and all the available resources are fully utilized to a point where production possibility frontier has been reached, no further reallocation takes place (Dornbusch, 1992), (Townsend, 1999) and (Akyuz, 2005). Nevertheless, the static gains from world trade highlighted in this paper can only be feasible when there is increase in production and export of the most competitive commodity given the world price. The theoretical link between trade liberalization and gains from Uganda s lint export discussed in this paper can further be illustrated as indicated in figure 4. For a country to realize gains from trade liberalization and consequently world trade, she should first produce abundantly, commodities of her comparative advantage and then supply the world market. This could possibly be the reason why most developing countries in Sub-Saharan Africa liberalized their economies during the 1990s but failed to increase export and consequently realize gains from world trade. Thus; although trade liberalization may be an important factor in world trade, it may not necessarily yield immediate gains from world trade unless countries produce abundantly commodities of their comparative advantage and then supply the world market. 3. Conclusions This study uses classical theory of comparative advantage to explain theoretical link between trade liberalization and gains from Uganda s lint export in the period following liberalization of the cotton industry. The study discovered that Uganda may not necessarily realize gains from trade liberalization and consequently world trade unless cotton is a commodity of her comparative advantage and that she produces it abundantly to supply the world market. 4. Policy Implication In order to realize gains from world trade, Uganda should produce abundantly commodities of her comparative advantage and then supply the world market. REFERENCES [1] Akyuz Y., (2005). Trade, Growth and Industrialization: Issues, Experiences and Policy Challenges, Trade Growth and Industrialization. Available at e.org.sg/title2/ftas. [2] Bakunda G., (2005). Impact of Trade liberalization on the Uganda s Economy; Kampala Uganda. DENIVA Development Network of Indigenous Development Association. [3] Balassa B., (1983). Trade Policy in Mexico, World Development Report, 11 (9); [4] Blake A., McKay A. and Morrissey O., (2001). The impact on Uganda Agricultural Trade Liberalization. A journal of Agricultural Economics Volum53 issue 2 of [5] Collinson C.D., Kleih U., Burnett D.G., (2002). Transaction Cost Analysis, Final Report prepared for Plan for Modernization of Agriculture. Published by the Natural Resource Institute. [6] CDO., (2005). Cotton Development Organization s Report Published in [7] CDO., (2008). Cotton Development Organization s Report Published in [8] Dornbusch R., (1992). The case for Trade Liberalization in Developing Countries; Journal of economics perspective, volume 6, No.1, 1992, pp [9] Greenaway D., Wyn M. and Wright P., (2002). Trade Liberalization and Growth in Developing Countries. Journal of Development Economics Volume 67(2002) pages 229 to 244. [10] International Monetary Fund, (1987). Trade and Exchange Rate Policies in Growth Oriented Adjustment program. NBER working paper No. WP [11] Pineiro V., (2006). The impact of Trade Liberalization and Policy Liberalization on Argentina s agricultural sector: Technology adoption in a Dynamic Model. A PhD Dissertation, University of Maryland (College Park, Md.). [12] Ricardo D., (1817). Principles of Political Economy and Taxation. Courier Dover Publications. [13] Santos-Paulino A. and Thirlwall A.P., (2002). The impact of trade liberalization on export growth, import growth, the balance of trade and balance of payment of developing countries; University of Kent June Available at func=synergy&synergyaction=showtoc&journal Code=ecoj & volume =114&issue=493&year=2004 =null. [14] Ssemogerere G.N. and Kasekende L.A., (1994). Constraint to Development and Diversification of nontraditional exports in Uganda, African Economic Research Consortium. pp [15] Thirlwall A. P., (2000). Trade Liberalization and Economic Growth: Theory and Evidence, African Development Review. ECONOMICRESEARCH PAPERSNO 63Copyright 2000; the African Development Bank 01 B.P Abidjan 01Côte d Ivoire. Available atwww.afdb.org/fileadmin/uploads/afdb/.../ fr-erp-63.pdf. [16] Thirlwall A. P., (2004). Trade, the Balance of Payments and Exchange Rate Policy in Developing Countries, 26 th May. Edward Elgar Publication. ISBN / Available at: id=2957. [17] Townsend R. F., (1999). Agricultural Incentives in Sub-Saharan Africa, Policy Challenge. -The World Bank, Publication, Washington DC.