Zimbabwe should use export taxes to industrialise

commodities for their export earnings.
Negative trends in the secular terms of trade, uncertainty rising from price variability, and difficulties in achieving economic diversification have all contributed to persistent development challenges and low incomes in such countries.
These include countries that show a high degree of export concentration, which renders them very sensitive to export price variations.
Also included are those countries whose exports are highly dependent on unprocessed primary products and have experienced secular declines in relative prices and high price variability, such as in the case of coffee, cocoa, coconut oil and minerals.
The importance of the commodity issue is recognised in the World Trade Organisation Part IV of GATT 1947 which makes explicit reference to the need to devise measures in order to attain stable, equitable and remunerative prices for primary commodities.
More recently, the issue has been included in the work of the Committee on Trade and Development.
While developing countries are rich in raw materials, developed countries do not have sufficient supplies of the raw materials they need for manufacturing.
To ensure they continue accessing cheap supply of raw materials from developing countries, the developed countries, particularly those in the European Union are trying to discipline developing country use of export taxes and restrictions at the WTO and in its free trade agreements including economic partnership agreement.
Export taxes have been used by governments in developed countries as a tool in their industrial policy and to raise revenue since the 11th century.
In fact, it was the most important tool in industrial development while England was industrialising.
In England export taxes were applied on raw wool and hides from 1275 to 1660 to promote domestic industry.
In fact, export taxes were the most important tool in industrial development. It ensured that foreign textile producers had to process more expensive raw materials than their English counterparts.
In addition, policies were implemented to attract foreign investors mainly from Holland and Italy who could then benefit from the domestic raw wool.
As wool manufacturing capacity grew in England so did the export duties, until England had sufficient production capacity to process all the wool they produced.
Export restrictions were so valued in English industrial policy that a century after Henry VII began applying export duties to raw wool, Elizabeth I heightened the restriction from export duties to a full embargo on raw wool.
However, England was not the first to acquire such an industrial and trade strategy.
Developing countries continue to use export taxes today as a source of government revenue, to encourage value added and infant industries.
They also use them to attract foreign investment, for price stability, to improve terms of trade, or to deal with currency devaluations and inflation and as a method of addressing tariff escalation in importing countries.
An export tax is a device to cope with fiscal policy and foreign trade and can be used as a means to obtain resources for development finance.
Many scholars have also recommended the use of export taxes during commodity booms, such as what was done by many countries in the commodity boom during the Korean War.
According to the WTO export taxes can be supported on the basis of a second best argument, in regards to using export taxes to mitigate commodity price fluctuations on the world market.
Governments could impose a high tax rate when world commodity prices increase and reduce or remove the export tax when commodity prices fall.
This way government could capture part of the gains arising from increasing commodity prices and could mitigate the adverse impact of falling prices on producer’s incomes.
Three motives justify the use of an export tax in these circumstances. First, it would mitigate the spill over of higher world prices into the domestic market (as the impact of an export tax is to lower domestic prices), thus protecting local consumers.
Second, it would increase government revenue, thus easing fiscal imbalances. Third, it would tax windfall gains of exporters, thus responding to a principal of fair redistribution of income.
However, governments must properly define their trade tax. A flat export tax that would not differentiate between price increases and price falls would not be effective in smoothing the transmission of world price shocks to the domestic economy.
Additionally, governments must be ready to enact policy changes congruent to the changing commodity prices.
For instance, they will have to save in periods of high tax revenue and spend more in periods with low tax revenue.
Export taxes can also be used as a device to improve a country’s terms of trade.
Terms of trade are the relative prices of a country’s exports to imports. A country with market power can levy an optimal export tax, which targets distortion, to improve its terms of trade and welfare.
While there are several possible interventions, which could improve the country’s terms of trade, an export tax is preferred instrument on analytical grounds because they precisely correct this underlying distortion without inducing others.
In addition, a country with market power will benefit from imposing an export tax, regardless of the behaviour of other exporting or importing countries.
The terms-of-trade gains in the exporting country arise because of the increase in the commodity export price caused by the implementation of the export tax.
An export tax imposed by a large country will increase the world price of the taxed commodity, and this, in turn, will increase the relative price of exports compared to imports.
For each unit of the exported commodity, the country imposing the export tax will be able to import more, and thus increase welfare.
Export taxes can be used to compensate for a country’s currency devaluation. The circumstances in which a country that devalues their currency is exporting commodities with little short-run elasticity of supply, the additional receipts of exports make no more than a small immediate contribution to the correction of the payment deficits.
Therefore, temporary export taxes can be levied on exports with low short-run elasticity of supply so the state can attain revenue, which would help to control private expenditures and thus support the devaluation.
An export tax reduces the domestic price of the taxed commodity, thus partially offsetting the inflationary pressures coming from higher prices abroad.
Second, an export tax on primary commodities will be reflected in lower costs for processing industries, thus furthering lowering consumption prices for processed goods.
Export taxes can be a highly valuable tool for industrial development and trade policy.
In addition, they can provide governments with additional revenue, improve terms of trade, ease inflationary pressure, compensate for devaluation and tariff escalation and most importantly preserve domestic raw materials for local processing to develop high-value added industries.
However, there are some factors that governments should pay attention to before increasing or imposing an export tax.
Like many policy tools and instruments, export taxes have proven to be extremely valuable to industrial development, especially in Europe, however, it is not a magic tool and still requires a few considerations.
The factors that should be considered are commonly mentioned in the diverse literature that highlights the benefits of export taxes. A few of these factors include: long-run demand and supply elasticity, competing goods that are substitutes on the world market, oligopolistic market structure and the optimal level of the export tax.
Additionally, export taxes have supplied governments with needed development finance.
However, it is at the discretion of every national government to decide which sector(s) of the economy to supply with revenue.
Therefore, depending on where a government chooses to invest, the distributional effects may be disproportionate amongst different societal groups.
Over the years, the Government of Zimbabwe had been calling on companies to add value on their export merchandise.
What is very clear is that this call had been falling on deaf ears. This is obviously due to the fact that most of these exporting companies are a subsidiary of foreign companies in the First World countries that in turn is dire need of raw materials which are obviously cheap therefore makes their manufactured goods competitive.
There is no incentive for foreign owned companies to engage in value addition.
This therefore clearly justifies the continuous call by Government arms on the need to stop the continuous export of primary products.
What had been disheartening though is that there is seems be no clear policy aimed at encouraging value addition save for the ban on export of raw chrome.
There is therefore need for the united call for the need to come up with an export tax by the Government if we are to stop the export of raw materials and again benefit from the numerous benefits that comes with an export tax.
An export tax is friendlier than the draconian total ban as it does not necessarily halt business which results in unemployment, loss of tax revenue and creation of monopolies as now in the case of total ban on chrome.
Because of a ban on export of raw chrome Zimasco has remained the only potential buyer of chrome with unlimited bargaining powers which has led to a situation where the company is now buying raw chrome at very ridiculous prices.
This is now undermining the current programme of indigenisation and economic empowerment.

l Gift Mugano is an International Trade Expert based in Port Elizabeth, SA. He is studying PhD in Economics at Nelson Mandela Metropolitan University. He is a consultant and programmes director of Africa Economic Development Strategies. Contact: [email protected], cell: +2778 017 4112