Tariffs on Food Imports in the 2010 Budget Not the Best

Fri, 11 Dec 2009 Source: Baafi, Alex Bossman

By Alex Bossman Baafi

In order to boost domestic rice, poultry and livestock production, the minister of finance and economic planning outlined in the 2010 budget plans to restore import duties on these food items including edible oil and fish products. Apart from giving the local production impetus it will also afford the government the opportunity to raise revenue. It could be recalled that at the heat of the global financial meltdown and food shortages at certain part of the world last year, ex President Kuffour waived the import duties on these food items to cushion the price hikes effects on consumers.

Tariffs of this nature are taxes on imports which take the form of ad valorem which is a percentage of the price of import. Tariffs used to restrict imports are most effective if demand is elastic. It can also be used as a means to raise revenue. Here they will be more effective if demand is inelastic. Again tariffs can also be used to raise the price of imported goods to prevent unfair competition for domestic producers.

This particular policy of the government has generated a lot of debate among politicians and economists alike. Many economic and political leaders are of the view that it is a policy in the right direction because it seeks to protect the local producers of rice, poultry and livestock. Much as it will go a long way to strengthen and improve our local production base it will also create employment for the teaming jobless masses of our people. Others even welcome the idea on the grounds that when it was waived by the previous administration, it benefited the importers rather than consumers since it did not culminate in the reduction of the prices of these items and in effect did not impact on the pockets of the ordinary people. It rather benefited the importers of those goods, especially the rice importers, at the expense of the ordinary man on the street.

Let us examine the policy carefully and analyse its socio-economic impact on the ordinary person and the economy. I totally disagree with those who thought that when the import duties were waived it did not amount to any significant decrease in the prices of the items in question and therefore it has to be restored. If anything all, at least, it held in check the prices of those commodities from skyrocketing because of the economic circumstances of the time.

I do agree that the nation imports over 70 percent of 500,000 tones of rice and the demand is expected to exceed 820,000 tones in the near future according to the budget. Certainly this situation must be checked. To revamp our agricultural sector is one of the ways to correct the situation but resorting to imposition of tariffs will not be the best solution to the problem at least for now. The use of tariffs to restrict imports is most effective when the demand for the affected commodities is elastic. That is a small change in the price of the commodity will result in a large proportionate change in its quantity demanded. Where there are close domestically produced substitutes then demand could be said to be elastic for that matter. Yes we produce some amount of rice in the country but do we produce sufficient quantity to meet the demand? Even the much touted Aveyime Rice that we made political capital of is scarce in the market. It stands to reason that the purpose of restoring the tariffs as impetus for domestic rice production for example will be defected. Because the nation does not produce enough to meet the demand, and people have also acquired the taste for imported rice, even though the price will go up as a result of the tariff, people cannot cut down their consumption in the short run and will be compelled to reallocate resources in order to be able to afford the rice which is one of the main staple food for our people.

One cannot also discount the idea that the tariff will be used as a means of raising revenue to the government even though the budget did not emphasize on this as the prime motive for restoring the import duties. The tariffs as a means of raising revenue will be more effective if demand is inelastic. That is to say that a change in the price will lead to small proportionate change in the quantity demanded of the commodity. As said earlier, because we do not produce enough locally and taste does not disappear suddenly, the revenue target for the government could be guaranteed in the short-run as demand will not shift significantly downwards in the short term. One thing is certain here, prices of imported rice, poultry products and fish will go up for sure. In the case of fish, the government failed woefully to capitalize on the good fishing season this year to make available premix fuel for the fisher folks to have gone in for a bumper harvest for a buffer stock. Higher inflation is likely to rear its ugly head again in the country with its concomitant problems including exchange rates management difficulties among others. Because this policy is directed at some of the basic necessities of life (food) in a developing nation like ours, we must be very careful in assessing its impact on the national economy. The prices hike that will result will make the average person on the street worse off because it will go a long way to reduce their disposable incomes and discourage savings habit which does not even exist for the mass majority of the people in this country. The average person spends more than 60 percent of their income on food not to mention payment for utilities and let alone school fees and other contingency spending for those that have families. Therefore any attempts to increase the prices of food items irrespective of the motives will not be in the interest of the consumer in my humble opinion.

For me the restoration of the tariffs is tantamount to protection which will tend to push up prices and restrict the choice of goods available. But apart from these direct costs to the consumers, there are several other problems. Some are a direct effect of the protection; others follow from the reaction of other nations. I know many will argue that this government intervention is good for the economy, yet, I will like to emphasise that this protection, however, may not be the best way of dealing with the problem because it may have undesirable side-effects. There may be a more direct form of intervention that has no side-effects. In such a case, protection will be no more than a second-best solution. For example, using tariffs to protect inefficient sectors from foreign competition may help prevent unemployment in those sectors of the economy but the consumer will suffer from high prices. A better solution will be to subsidise and put more investment in those efficient areas of the country with a comparative advantage. This way unemployment is avoided, but the consumer does not suffer. By comparative advantage, I mean putting more emphasis, in this same agricultural sector, producing products that we have the lowest opportunity cost over other countries. Better still and the common practice even in the advanced world is giving subsidies to domestic producers to prevent competition from otherwise lower-priced imports.

Another side effect of this policy is retaliation. The imposition of the tariffs will reduce imports but we must remember that these imports are other countries’ exports. The affected countries may impose restrictions on our exports. Any gain to our firms competing with their international counterparts who import from us is offset by a loss to our local exporters. What is more, the domestic consumers suffer, since the benefits from comparative advantage have been lost. The caution here is that increased use of tariffs and other restrictions can lead to trade war, with countries cutting back on imports from our country. In the end everyone loses. Again, protection may allow firms to remain inefficient. By removing or reducing foreign competition, it will reduce firms’ incentives to reduce costs and operate efficiently.

If the government want to give impetus to domestic rice, poultry and livestock production, taxes on imports is not the best solution. The government must first invest heavily in the agricultural sector by moving aggressively beyond what it is doing now. She must work hard to resolve land ownership problems by negotiating with landowners to release large expand of land for commercial farming based on provision of adequate machinery and equipment, resort to irrigation instead of the rain-fed agriculture. There should be more assistance to farmers, providing them with quality seedlings, fertilizers, extensions services. Provisions of affordable credit, post harvest storage facilities, training and infrastructure for the farmers to get access to market their produce.

It will certainly take time, efforts and money to be able to turn around our agricultural sector to meet the desired objective. Until that is done, the government intervention as contained in the 2010 budget will bring more harm than good. By and large I strongly believe that the timing for the restoration of the import duties as contained in the budget is premature judging from the economic conditions of the time. It will continue to allow our local producers to be inefficient, the average person will be worse off by suffering higher prices and has many more side-effects some of which had been explained above.

As a social democratic government, you need to have a second look at this particular intervention, for, it goes a long way to negate your promised social democratic governance agenda and more importantly, the government’s macroeconomic target of average inflation rate of 10.5 per cent and end of inflation rate of 9.2 per cent for the 2010 fiscal year will once again be a mirage.

Email: abkbossman@yahoo.co.uk

Columnist: Baafi, Alex Bossman