Effects of Customs Tariff Reduction on Ethiopian Trade and Economic Growth: A Co-integrated Var Model Approach
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Date
2016-06
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Addis Ababa University
Abstract
Customs tariff plays an important role in the Ethiopian trade and growth. It contributes a vital share in revenue generation needed to finance the economy. The reviewed empirical literature has indicated that the effects and contribution of customs tariff to the government budget in Ethiopia are not yet identified. Specifically, the importance of imposing customs tariff, the share of customs duty in the public revenue, its revenue productivity and its determinants are yet studied. This can negatively affect the fiscal role of customs tariff in the country and may also distort the decisions of the policymakers.
For this research, secondary macroeconomic data for the period between 1975/76 and 2014/15 Ethiopian fiscal years, were collected mainly from the Ministry of Finance and Economic Cooperation (MoFEC), the Ethiopian Revenues and Customs Authority (ERCA), and additionally from other sources. Extensive theoretical and conceptual reviews, simple descriptive statistics, and co-integrated VAR model is applied to analyze the data.
Accordingly, the major reasons to impose tariffs on imported goods are found to be revenue generation, protection of domestic industries, reducing the balance of payments and trade deficits, and capital formation. Simple descriptive statistics have shown that customs tariff, in the form of customs duty, has very significant share (36%, and15%)in the foreign trade taxes, and total taxes, respectively) in the Ethiopian tax structure. Although the contribution of customs duty in the Ethiopian government revenue is significant, the customs duty has been neither buoyant nor elastic. This implies that both the direct discretionary and non-discretionary measures have not yet brought the buoyancy and elasticity of the customs duty to the unitary level.
The long-run equilibrium equation shows that, citrus paribus, direct and indirect domestic taxes, foreign trade taxes (FTT) and exchange rate have positive and significant impact on economic growth (GDP). Other independent variables (import, weighted average customs tariff rate, and revenue from customs duty) have a negative but significant impact on economic growth.
Key words: customs tariff, customs duty, tariff liberalization, co-integrated VAR model, openness, trade, revenue productivity
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Keywords
Customs Tariff, Customs Duty, Tariff liberalization