Polcy. Plannhi, and Research WORKING PAPERS IntLnstIonal Commodity Market International Economics Department The World Bank June 1988 WPS 10 Optimal Export Taxes for Exporters of Perennial Crops Mudassar Imran and Ron Duncan Governments relying heavily on export taxes for revenue tend to tax commodity exports more heavily, which is consistent with short-ran elasticities of demand and supply. But this makes them more susceptible to losing their market share over the long run. The Policy, Phanning, nd Research Complex distfibutes PPR Wosking Papers to dissminste the findings of wdck in peogrm and to encouage the exchange of ideas among Bank staff and all others interested in development issues. These papers cary the names of the authes, reflect only their views, and should be used and cited accordingly. The findings, intmerpretatims, and conclusions are the auffirs' own. They should not be* aibuledto theWorld Bankl, is Board of Direcors, itsmanagemnent, or any of its manbercounuies. Plc,Planning, and Rrsech Intwrnstionel Commodity llnrkets Since the estimate of the optimal export tax is the loss of market share over time because it based on the price elasticity of demand and the reduces the incentive for its own producers price response of the commodity from other (while raising world prices) and encourages the sources, should policymakers look at short- or substitution of other commodities by other long-term elasticities? The difference is crucial, producers. especially where there is a large gap between the two. Governments weighing the optimal export Actual export tax rates applied by Cameroon tax have a choice - accepting lower tax reve- and Nigeria on cocoa and by Sri Lanka on nues now and reaping higher revenues in the natural .ubber were much higher than the future, or setting their sights on high short-term optimal rate even when based on short-run tax revenues and losing out in the long run. elasticity estimates and may well have contri- buted to reductions in their world market shares. A comparison of the esiumated optimal export tax rates for major developing country Recent reductions in export taxes by domi- producers of cocoa, coffee, tea, and rubber with nant rubber exporters appear to have exerted current tax rates shows the following. When the downward pressure on world prices, which is govemnment depends heavily on the tax for its consistent with theory. revenue, it taxes on the basis of the short-nm elasticities. This tax rate is much higher than if This paper is a product of the Intemational the long-run elasticities were used, which is Commodity Markets Division, Intemational usually the case when the taxes are a small Economics Departnent. Copies are available proportion of govemment revenues. But the free from the World Bank, 1818 H Street NW, higher tax rate makes the country susceptible to Washington, DC 20433. Please contact Audrey Kitson-Walters, room S-7053, extension 33712. The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy, Planiing, and Research Complex. An objective of the series is to get these findigs out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank. Copyright @ 1988 by the International Bank for Reconstruction aDd Development/The World Bank - ii - Table of Contents List of Tables ........... ABSTRACT iv............ .................................... ............. iv SUMMARY* **6 *v I. INTRODUCTION ....................1 II. THEORETICAL DERIVATIONS ............ Price Elasticity of Import Demand ooooooo*oooooooeooo3 Optimal Export Tax ...... III. OPTIMAL EXPORT TAX ESTIMATS0.... Export Shares and Supply Elasticities 10 Import Demand Elasticity Estimates ........16 Calculation of Optimal Export Taxes .......20 (ii) Tea .............................2 (iii) Coffee .... (iv) Natural Rubber.................... e... ......o... eeee.e. 29 Annex 1. Derivation of Import Demand Elasticities Facing Individual Exporting Countries. cc..... .e e e.e...... ... 36 Annex 2. Details of Export and Other Commodity Taxes for Cocoa, Coffee, Tea and Natural Rubber.....e.e.................38 - iii - List of Tables Table 1: WORLD MARKET SHARES AND SUPPLY ELASTICITIES FOR MAJOR EXPORTING COUNTRIES .......................................12 Table 2: ESTIMATES OF LONG-RUN SUPPLY ELASTICITIES: COCOA, COFFEE AND NATURAL RUBBRR l ............... ... ....... Table 3: COCOA: IMPORT DEMANL ELWTICITY ESTIMATES ......................15 Table 4: TEA: ESTIMATES OF IMPORT DEMAND ELASTICITIES ...................17 Table 5: COFFEE: ESTIMATES OF IMPORT DEMAND ELASTICITIES ................18 Table 6: NATURAL RUBBER: ESTIMATES OF IMPORT DEMAND ELASTICITIES ........19 Table 7: COCOA: IMPORT DEMAND ELASTICITIES FACING MAJOR SUPPLIERS AND THEIR OPTIMAL EXPORT TAXES ............................. 21 Table 8: COCOA: EXPORT TAXES, EXPORT UNIT VALUES, EXPORT VOLUMES, PRODUCER PRICES AND PRODUCTION FOR MAJOR EXPORTERS, 1980-84.....23 Table 9: COCOA: INDICES OF WORLD EXPORT UNIT VALUE AND WORLD PRICES ......................24 Table 10: TEA: IMPORT DEMAND ELASTICITIES FACING MAJOR SUPPLIERS AND THEIR OPTIMAL EXPORT TAXES .. ......... ....... . . . .. ...... .25 Table Ila: TEA: EXPORT TAXES, EXPORT UNIT VALUES, EXPORT VOLUMES, PRODUCER PRICES AND PRODUCTION FOR SRI LANKA, 1980-84 ........... 27 Table llb: TEA: INDICES OF WORLD EXPORT UNIT VALUE AND WORLD PRICES ........*so...... o.................27 Table 12: COFFEE: IMPORT DEMAND ELASTICITIES FACING MAJOR SUPPLIERS AND THEIR OPTIMAL EXPORT TAXES ...................*0*28 Table 13: NATURAL RUBBER: IMPORT DEMAND ELASTICITIES FACING MAJOR SUPPLIERS LAND THEIR OPTIMAL EXPORT TAXES ....................... 30 Table 14a: NATURAL RUBBER: EXPORT TAXES, EXPORT UNIT VALUES, EXPORT VOLUMES, PRODUCER PRICES AND PRODUCTION FOR MALAYSIA AND INRBNESIA ..............IN E O W Table 14b: NATURAL RUBBER: INDICES OF WORLD EXPORT UNIT VALUE AND WORLD PRICES ................. ooooe .. oooooo32 I. IIMODUCTIOg* 1. Primary commodity exports are subject to substantial export taxes in a large number of developing countries. In many cases such taxes may be the major viable source of governmeat revenue, primarily for the reason that in low-income countries the necessary infrastructure for the efficient collection of other taxes, such as income taxes, is lacking. The use of export taxes is, at times, based upon the assumption that the tax-imposing country has a degree of monopoly power in the world market, i.e., that the demand for its imports is less than perfectly elastic and therefore restriction of its exports will increase its national welfare. The optimal export tax is the rate of tax that maximizes its national income from the commodity. 2. The main purpose of this paper is to determine timal export tax for major esporters of cocoa, tea, coffee and natural :-hber--the primary commodities most heavily taxed by developing countries. 3. Since the estimate of the optimal export tax is based in part upon the estimate of the foreign elasticity of demand and the supply response from the rest of the world, the question arises whether it is the long-run elasticities or the short-run elasticities that are relevant to the tax- setting behavior. The choice oi the appropriate elasticities may be crucial, especially if they differ considerably betweer. the short and long run. In making the decision, the choice arises between lower foreign exchange earnings * While absolving them of any responsibility for the outcome, the authors thank the following for their comments and suggestions: Takamasa Akiyama, Mat Gbetibouo, Gerry O'Mara, Maurice Schiff, Suan Tan, Panos Varangis and Rob Weaver. in the short run and higher earnings later on or higher export earnings now and lower revenues later. It is hypothesized that those countries with a heavy dependence upon revenues from this source will tend to set the tax with respect to the short-run elasticities. It is shown here that the optimal tax will also depend upon the length of the adjustmetit period between the short run and the long run and the government's rate of time discount. 4. The immediate effect of the imposition of an export tax is a chlange in khe relationship between prices received for domestic consumption and those for exports. Whereas prices received for exports rise, domestic prices can be expected to decline. Therefore, domestic consumption increases and exports decline while total production and farm income are reduced. The effects of changes in export taxes in the major exporting countries on producer prices, production, export prices and export revenues are examined. In recent years there have been several important changes in export tax policy involving these commodities. The impact of these changes on world prices is of interest in analyzing recent comuodity price movements and for studying the likely impact of future tax changes on individual countr es and on world markets. 5. Many countries which have very small shares of world markets also tax these four commodities heavily, but because they have no market power there is no question of an optimal export tax in the sense we use it here. We recognize that though national income is reduced by the export tax in these cases, such taxes may remain the best form of raising government revenue due to its low collection costs. But beyond discussing the implications of different social discount rates, we do not go further into tax policy. II. THRORETICAL DRIVATIOUS Price Elasticity of Import Demand 6. The price elasticity of world demand for imports of commodities varies from the price elasticity of demand faced by each individual exporter. While the world demand for imports may be inelastic, the demand for imports facing a particular exporter may be elastic; it is perfectly elastic for "small country" exporters. It is this latter elasticity that is relevant to each supplier to the world market and to the question of the optimal export tax. Calculation of this'elasticity depends on the following: (a) the world import elasticity of demand for the commodity, (b) the export share of the commodity, and (c) the elasticity of supply from the rest of the world. 7. The relationship is presented as follows: 1/ w row row n~.-A. £.. n= 11 1 11 1 where ni3.= elasticity of demand facing country j for the ith commodity nii= elasticity of world demand of commodity i A,°w = rest of the world's export share of ith commodity 1/ The derivation is presented in Annex 1 Aj = country j's export share of commodity i 1 J. = - elasticity of supply of coamodity i by the rest of the world. 11 8. This relationship states that for any given value of the world demand elasticity, the demand elasticity faced by k particular supplier will be greater the smaller its market share and the larger the supply response by the rest of the world. Optimal Export Tax 9. In the following, a simple import demand model is presented which leads to the development of the formula for the calculation of an optimal export tax. The tax formula is derived for both short- and long-run elasticities of import demand. 1/ The derivation assumes that the foreign import supply elasticities are infinite. 10. Import demand x(t) as a function of weighted past prices of import goods relative to their substitutes (p(5)) is given as x(t) = A - bB Z e P(s) ds (2) The short-run response to price changes is given as - =t -bB,(3 aP(t ) 1/ The formulation draws on Repetto (1972). The total demand response to a change in price at a given time (s) is ax(t) -t = -bB Jeb(t-s)dt - -B J -Ž8.z-BJ(4) It is eden, therefore, that the short-run elasticity differs from the long-run elasticity by a factor (b). The value of (b) is between 0 and unity. A larger value of (b) implies a faster demand response. The objective function in terms of net national beL-fits Z is given as the difference between export revenue and the resource costs of exports (C) (t) C(t) P(t) - C (X(t)) (5) In an intertempo:al framework, the ebjective is taken to be the maximization of a discounted stream of net national benefits over an infinite horizon. The discount factor (r) is interpreted as the social rate of time discount. * e rt Ztt) dt = maximum (6) The method of solution to the problem is to invert the demand function to express price as a functicn of quantity demanded. It is a convenient charac- teristic of the exponentially-weighted demand function that it can be easily inverted through differentiation with respect to time such that d x -t - - bB (p(t) * BAj(7) - 6 - which is solvable for price. in terms of demand and its rate of change over time (x') A - x XI P(t) B bB (8) This expression for price is then substituted into the objective function Max .m - rt((A - r) x _ xx - C(x)) dt o B -TB x)d 9 = lz W (t,x,x ) dt (10) According to Euler-s theorem in the calculus of variations, a necessary condition for a maximization function is d =W (11) dt x x This is worked out as follows WI = ert (A c2 * ) (12) d Ix = bB (rx - x I (13) Which leads to the necessw condition A- 2x () (14) B bB c()(4 -7- It also follows that A-x x 0 and p = - , s0 p _ x(r bBB) = c (15) p (1+ 1 (r B))=' (16) eI WI tre et is the long-run demand elasticity [p/hl [-B) . Sins n competi- t'.we equilibrium, producer receipts will be equated with marginal resource costa, the optimal export tax can be estimated as a percentage of the export price as follows: T* I ( b) L r( + b) 'b (rb)T (17) e eI b5 = (r + b) T' where eI is the long-run demand elasticity (!) (-B); eB is the short-term demand elasticity (p/x)(-bB); and T' is the tax that would be levied if only the short-term demand elasticity was taken into consideration and all lagged- demand responses were ignored or treated as exogenous technological "trend." It is seen from the above that tie optimal tax depends upon the long-term and short-term elasticities, th2 relationship between them, and on the social rate of time discount. In the absencp of overt measures of the social discount rate for each country, the long-term bond rate, or something approaching that concept was used (such as the central bank discount rate, the money market rate or the T-Bill rate). In highly inflationary countries, however, the market rates may not be a good measure of the social rate of time discount. Hence, optimal taxes calculated using the discount factor for such economies may be biased. 11. At the estimation stage, besides the simple import demand function specified above, other specifications of the import demand function have also been estimatel. In such specifications, imports are regressed over CDP per capita, relative prices and the prices of substitutes. 12. While the specification of import demand functions is rather straightforward, the specification of perennial crop supply functions is a complex q-estion which has been the focus of much research. The most appropriate approach to model the supply response of perennial crops is the vintage capital approach (Wickens and Greenfield, 1973). The vintage capital approath suggests the direct specification and estimation of the structural relationships, i.e., an investment function, a harvesting decision function and a vintage capital production function. The main thrust of the approach, expressed in a simplified way, is that potential output is related to past plantings. A limitation of the approach is that it implies that past applications of inputs (labor, other capital, fertilizers, etc.) and past harvesting decisions do not significantly affect the output currently obtained from a given stand of trees. This criticism applies more in the case of rubber than to other perennial crops. The rate at which a rubber tree is tapped does affect potential output in later periods. Also, the rate of extraction can be increased from a given tree if the stand is expected to be cut earlier. 13. Other factors of production such as labor are not included in this specification on the assumption that they are used in fixed proportions. It also implicitly assumes that all factors are fully utilized such that all potential output is harvested. If indeed all output is not harvested, discontinuity in the derivative of output with resoect to price is introduced; which would have serious repercussions on the estimation of supply responses to changes in prices. Therefore, it may be appropriate to use an approach whereby the age composition determines the weights of the distributed lag response of supply to changes in relatiwe prices. Again, this assumption may be more relevant for rubber than for other crops. A further limitation of this approach is that it does not allow the assignment of correct bLights to past responses. In light of rhese limitations, both specifications have been used to estimate the price Lasticity of supply where such estimates have been necessary. - 10 - III. OPTIMAL EXPORT TAX ESTIMATES 14. In this section, the estimates adopted for the world import demand and supply-price elasticities are set out and the import demand elasticities for each of the countries/commodities are calculated. The optimal export taxes for each country/commodity are then calculated and compared with the actual tax situation in each country. Alternative calculations of the optimal export tax are made for short- and long-term elasticities and for when the discount rate for each country is taken into account to give some idea of the likely trade-off between more export revenue now and more export revenue later. Export Shares and Supply Elasticities 15. In Table 1, the average export shares for the four commodities held by the major exporters for the period 1980-84 are given in column 1. Column 2 gives estimates of the short-run supply elasticity for each exporter and for the rest of the world. Column 3 gives short-run supply elasticity estimates for the rest of the world as defined for each major exporter. Most of these supply elasticity estimates are taken from recent published studies--mostly by the International Commodity Markets Division of the World Bank. The remainder were estimated by the authors using the almon lag approach described above. 16. The cocoa export industry is dominated by Brazil, Cameroon, CBte d'Ivoire, Ghana and Nigeria. The world production share of these countries is about 75Z while they account for about 80Z of world cocoa exports. C6te d'Ivoire holds the dominant share of the world market for cocoa. The next most important during this period was Ghana with 14X; it has since been overtaken by Brazil. - 11 - 17. Tea is mainly produced in India, Sri Lanka, China and the USSR. In 1982, 67Z of the total world production took place in these four countries. In 1984, the export shares of India and Sri Lanka, the two most important exporters, totaled slightly less than one half of world exports. 18. Coffee is the major export of a large number of developing countries. As can be seen from Table 1, however, the world market is dominated by Brasil and Colombia. While countries such as Burundi have about 85Z of total exports coming from coffee, their world share is so small (0.7%) that even large changes in their exports could not influence world prices. However, two small exporters have been includeId to illustrate the results of the optimal export tax calculations for small exporters. 19. The export market for natural rubber is dominated by Malaysia which supplied about 41Z of the total in 1985. The 5-year average (1980-84) for natural rubber exports shows that the combined share of Indonesia, Malaysia and Thailand is about 90% of the total. 20. Looking across the short-run supply elasticity estimates one is struck by the fact that the elasticities for cocoa and natural rubber are much higher than for tea and coffee--at least for the major suppliers. There are good reasons for believing that the elasticities for the various crops should be more alike. There are simultaneity problems in estimating supply responses for the larger suppliers--as their production changes affect the level of prices. This reason may explain why the supply response for coffee in Brazil and Colombia is so much lower than the others. The much lower estimates for tea producers may be partly explained by another statistical problem. Tea is produced from leaf shoots and their production appears to be much more affected by weather than the fruits-coffee and cocoa. Therefore, there is a - 12 - Table 1: WORLD MARKET SHARES AND SUPPLY ELASTICITIES FOR MAJOR EXPORTING COUNTRIES Supply Elasticities b/ Share of Domestic Rest of the World c/ Total Exports (X) a/ Short-run Short-run Cocoa Brazil 11.9 0.21 d/ 0.31 Cameroon 8.1 0.68 0.29 C6te d'Ivoire 32.7 0.30 e/ 0.22 Ghana 14.2 0.53 f/ 0.25 Nigeria 10.4 0.31 0.31 Rest of the World 22.7 0.20 0.29 Tea &/ Bangladesh 3.4 0.17 0.17 China 13.0 0.15 0.16 India 24.6 0.13 0.14 Indonesia 8.3 0.16 0.16 Kenya 10.0 0.17 h/ 0.13 0.25 Ti Malawi 4.1 0.21 0.17 Sri Lanka 20.9 0.03 0.17 Rest of the World 15.9 0.11 i 0.14 Coffee k/ Brazil 26.9 0.09 0.16 Colombia 14.4 0.07 0.17 C6te d'lvoire 6.4 0.55 0.15 Kenya 2.3 0.64 I/ 0.17 Rest of the World 50.0 0.20 0.95 Natural Rubber m/ Indonesia 27.7 0.43 n/ 0.34 Malaysia 44 0 0.49 o/ 0.24 Sri Lanka 3.8 0.63 0.43 Thailand 16.6 0.39 0.39 Rest of the World 7.9 0.41 0.42 a/ 1980-84 average. bi Unless otherwise noted, the elasticities were estim-ted using the almon lag specification outlined in the text. c/ The supply elasticities for the rest of the world have been calculated as weighted averages of supply elasticities for a*l other countries. dl From Akiyama and Bowers (1984). e/ The average of the elasticities calculated by Behrean (1968) for old medium and new areas. f/ From Behrman (1968). j/ Supply elasticity estimates from Akiya_ and Trivedi (1987). h/ Smallholders. I/ Estates. ]/ Estimate for rest of Africa. k/ Supply elasticity estimates from Akiyama and Duncan (1982). 1/ From Maitha (1970). m/ From Tan (1984). Crilli (1981), using the Nerlovian approach, estimated the short-run elasticities in Malaysia, Indonesia and Thailand to be 0.19, 0.1 and 0.24, respectively. n/ Average of estates and smllholders. - 13 - lot of "noise" in the tea production data which biases the price response downward. On the other hand, the opportunities for short-term reuponses through fertilizer applications and tapping frequency appear to be greater for rubber than for the other crops. In summary, therefore, the short-run elasticity estimates appear reasonable, except that the estimates for tea may be low, as may the estimates for the coffee response in Brazil and Colombia. 21. Estimates of long-run supply response to price changes have been much less commonly undertaken for these comodities. Therefore, it is more difficult to come to confident judgments about them. Estimates obtained for cocoat coffee and natural rubber are given in Table 2. There is a tendency to underestimate long-run supply responses in agriculture because the specifications used do not allow for the long-term effects of intersectoral resource flows. Therefore, the estimates obtained for cocoa and coffee may well be on the low side. Of course, the response will differ depending on whether the price is changed in isolation or in unison with other competing products (in the latter case the elasticity will be much lower). Between countries it may differ because of, for example, the differences in availability of suitable land. Given the uncertainties about the long-run supply response, but believing that a conservative estimate--even for long- established producers--is in the range 1.5-2.0, values in this range have been used for the rest-of-the-world supply response in subsequent calculations. 22. A final point which should be made relates to a comparison of elasticity estimates across countries. It is commonly argued that supply response in African countries is slower than in other countries. There is no support for that argument in the above estimates. - 14 - Table 2: ESTIMATES OF LONG-RUN SUPPLY ELASTICITIES: COCOA, COFFEE AND NATURAL RUBBER Coffee a/ Cocoa Natural Rubber b/ Brazil 1.10 Cameroon 1.81 c/ Colombia 0.96 C6te d'Ivoire 0.73 0.80 c/ Indonesia 2.53 Kenya 1.33 d/ Malaysia 3.35 Nigeria 0.71 c/ Sri Lanka 4.20 Thailand 3.95 a/ From Akiyama and Duncan (1982) unless otherwise noted. b/ From Tan (1984) unless otherwise noted. c/ Behrman (1968). d1 Maitha (1970). Ford (1971) estimated the long-run supply elasticity for Kenya coffee for estates and smallholders to be 1.18 and 1.55, respectively. - 15 - Table 3: COCOA: IMPORT DEMAND ELASTICITY ESTIMATES Income Price Elasticity Elasticity Short-run Long-run Substitute a/ Time Series 0.46 0.17 --0.25 -0.34 '-0.43 b/ -0.19 (5.9) (7.3) (1.9) (5.17) (5.181 (5.3) North America - -0.12 -0.15 -0.47 -0.1 (1.86) (1.3) (3.5) (1.1) Western Europe 0.26 -0.11 -0.50 -0.026 (6.6) (3.7) (3.4) (1.3) Eastern Europe 0.86 -0.17 -0.45 --0.63 0.11 (3.2) (2.5) (2.5) (4.4) (2.5) Pacific -0.13 c/ -0.30 -0.09 (4.2f (1.11) (1.5) Rest of the world - -0.21 -0.35 -0.11 (2.11) (1.87) (1.1) a/ Price of sugar. -X Estimate using expected price specification. C- Coefficient of lagged price. - 16 - Import Demand Elasticity Estimates 23. Estimates of cocoa import demand elasticities are presented in Table 3. From these estimates the short-run world price elasticity appears to be around -0.2 and the long-run elasticity about -0.4. Import demand functions were estimated for the major (onsuming/importing regions as well as for total world import demand. These country estimates provide a useful check of the estimates from the world demand function as well as supplying useful information on the import responsiveness of these various regions. More than 90% uf cocoa consumption takes place in the industrial countries and centrally planned economies. 24. Estimates of the import demand elasticities for tea are presented in Table 4. Tea is mainly consumed in India, China, the United Kingdom, the USSR and Japan. There appears to be a tendency for increasing per capita tea consumption in the developing countries while per capita consumption in industrial countries seems to be declining. Again, the global short-run price elasticity is around -0.2 and the long-run elasticity about -0.4. 25. Estimates of world import demand elasticities for coffee and demand elasticities for major importers are presented in Table 5. Both the short- and long-run price elasticities appear somewhat lower than for tea and cocoa. Given the increasing domination of the EEC over the United States in the consumption of coffee, the global price elasticities appear likely to fall to even lower levels in the future. 26. In Table 6, the results from estimating the import demand models for natural rubber are presented. It is apparent that the estimates for the world market generally reflect the relatively high short- and long-run price elasticities of natural rubber imports for North America. The substitution - 17 - Table 4: TEA: ESTIMATES OF IMPORT DEMAND ELASTICITIES Income Price Elasticity Elasticity Short-run Long-run Substitute Time Series 0.66 -0.17 - -0.3 a/ -0.38 -0.42 b/ (3.8) (7.4) (5.4i (9.8) (1.8) - horth America - -0.21 -0.28 -0.05 b/ c/ (2.1) (5.3) (0.48) Western Europe - -0.09 -0.1 - (1.2) (0.56) Eastern Europe - -0.23 -0.46 0.11 b/ (1.02) (1.6? (0.8) Pacific - -0.13 -0.13 (0.43) (0.48) Rest of the world - -0.19 -0.34 0.07 c/ (3.4) (9.5) (1.67) a/ Expected price. b/ Unit value of manufactured exports from industrial countries (MUV). cR Real price of coffee. - 18 - Table 5: COFFEE: ESTIMATES OF IMPORT DEMAND ELASTICITIES Income Price Elasticity Substitute Elasticity Short-run Long-run Time Series -0.15 - -0.19 -0.23 -0.09 a/ (5.19) (4.3) (3.7) (0.59) North America -0.17 ' -0.20 -0.44 0.24 a/ (2.1) (2.4) (2.5) (2.8) Western Europe 0.78 -0.11 -0.12 0.05 a/ (4.3) (3.27) (2.5) (1.16) Eastern Europe 0.97 -0.14 -0.14 b/ 0.31 c/ (4.5) (2.6) (2.1) (1.47) Pacific 1.67 -0.32 -0.35 (11.8) (1.78) (2.1) Rest of the world - -0.12 -0.28 0.49 c/ (2.5) (2.69) (11.6) a/ Price of tea. bi/ Coefficient of lagged price. ci MUV. - 19 - Table 6: NATURAL RUBBER: ESTIMATES OF IMPORT DEMAND ELASTICITIES Income Price Elasticity Elasticity Short-run Long-run Substitute a/ Time series 0.40 -0.27 b/ -0.76 0.12 (4.9) (1.37) (2.7) (0.53) North America n.s. -0.27 c/ -0.72 0.56 (3.6) (4.16) (1.67) Western Europe - -0.12 -0.27 0.004 (2.1) (1.1) (0.02) Eastern Europe - -0.07 -0.25 - (1.18) (1.18) Pacific - -0.07 c/ -0.46 0.06 (0.72) (0.86) (0.56) Rest of the worl.d - -0.18 c/ -0.87 0.25 (2.5) (2.76) (5.8) a/ Price of synthetic rubber. b/ Estimates with expected price. cl Coefficient of lagged price. elasticity betweep synthetic rubber and natural rubber is also fairly high in North America mainly because of the greater flexibility in the input mix in tire production and greater availability of domestically-produced synthetic rubber in the United States; Western European tire manufacturers most use superior quality natural rubber imported from Malaysia in order to meet the demand for higher standard tires, thereby restricting the use of synthetic rubber. Short-run elasticities for other regions are low in general. The long- run import demand elasticity estimate is -0.76, again reflecting the influence of the North American market and the developing countries which make up the rest-of-the-world category. - 20 - Calculation of Optimal Export Taxes 27. In this section the import demand elasticities facing each major exporter and their optimal export taxes are calculated using the formulas derived earlier. The optimal tax calculations are made for short- and long-run world import price elasticities, for short- and long-run rest-of-the-world supply elasticities and with and without application of the social discount rate. The discount rates have not been applied to the calculation of long-run optimal export taxes since the rate of time preference and time discount are expected to change over a longer term. Hence, calculations of the long-run optimal taxes based upon a fixed rate used for the short run may lead to misleading conclusions. (i) Cocoa 28. The demand elusficities faced by major suppliers to the world cocoa market and the optimal export taxes for each country are presented in Table 7. 29. The import demand elasticity facing each supplier is inversely related to its share in the world market and inversely related to its optimal export tax. C6te d'Ivoire faces the least elastic demand because it holds the largest share. In the short run the demand elasticities are quite low, but become much more elastic when using long-run coefficients for world import demand and world supply. The optimal tax for C6te d'Ivoire is the highest of the five countries. Again, these vary considerably depending on the assumptions used. Of the taxes in effect in May 1982, CBte d'Ivoire had by far the lowest and it was lower than its optimal tax calculated using short-run elasticities but not lower than that calculated using long-run parameters. The export tazes levied in the remaining countries are much higher than their - 21 - Table 7: COCOA: IWPORT DEMAND ELASTICITIES FACING MAJOR SUPPLIERS AND THEIR OPTIMAL EXPORT TAXES Export Taxes (Porcent) Import Demand Elasticitios Optimal Tax Short-run - Long-run b/ Actual c/ Without Discount Rate With Discount Rate Short-run Long-run Short-run Brazil -4.3 -14.5 55 d/ 11.7 3.4 15.9 Cameroon -5.9 -22.0 40 8.5 2.2 10.0 Coto d'lvoire -1.3 -4.3 25.12 37.7 11.6 45.0 Ghana -3.2 -11.9 70 e/ 15.6 4.2 21.0 Nigoria -4.8 -16.8 50 IV 10.4 3.0 12.5 a/ Based on a short-run world Import domand elosticity of -0.20 and short-run rest-of-the-world supply elasticities from Table 1. b/ Based on a long-run world Import elasticity of -0.4 and long-run supply elasticity for the rest of the world of 1.5. S/ Export taxes on cocoa beans as of May 1982 (source: Gill and Duffus, London). Refer also to notes 1, 2 and 12 at back of toxt. d/ In 1983 Brazil dropped Its export tax on cocoa to about 20% of the f.o.b. price. ! Ghana Is In the midst of simplifying Its export procedures and regulations with the aim of increoasInog exports. f/ In December 1986. Nigeria abolished Its cocoa board (as well as other commodity boards). The expert taxes to be applied are still to be announced. optimal level under all calculations. In 1983 Brazil reduced its tax to 20X. The downward revision has brought the tax close to its optimal level in terms of short-run elasticities. The existing levy on Ghanaian exports is 7O0, of which 57Z is the export tax while 23Z goes to the cocoa marketing board net of marketing costs. This is a much larger tax than the optimal level under any considerationa. The same is true of Cameroon, Chana and Nigeria. 30. To examine the impact of these countries adjusting toward their optimal export taxes, details on actual export taxes, export unit values, - 22 - export revenues, production, and producer prices are presented in Table 8 for each country for the period 1980-84. The indices of world export unit value. and international cocoa prices are given in Table 9 for the same period. The analysis is only descriptive and the conclusions drawn cannot be definitive because of the multiple possible sources of variation for each variable. 31. As Brazil is the only exporter which has altered its export tax in recent years, the analysis will mainly focus on Brazil. It appears from an examination of the Brazilian data that changes in export taxes affect producer prices and output. The tax reduction in Brazil from 551 in 1982 to about 20X in 1983 was followed by an increase in the producer price by about 761 over its 1982 level and by about 30X over the 1981 level. Production increased by 7X in 1983 and by 101 in 1984 over the 1982 level. The conclusion drawn from these observations is lent more weight if Brazilian behavior is compared to the behavior of the other major suppliers. In 1983, real producer prices in the Cote d'Ivoire increased by only 6.3X and output declined over its 1982 level. Producer prices measured in real terms declined in Ghana, Nigeria and Cameroon between 1982 and 1984. It may be deduced from these observations, therefore, that the large increases in producer prices and output in Brazil in 1983 and 1984 were at least partially due to the tax reduction. 32. The effect of the tax reduction on export unit values for Brazil is less clear. Theoretically, a decline in the unit value for Brazilian exports would be expected as well as a decline in the world price in proportion to the Brazilian share of the world market. To the contrary, the unit value of Brazilian exports increased during the two years following the reduction in the export tax. This was most likely due to the fact that during 1983 the West African countries experienced prodIction losses lue to widespread drought and Table 6: COCOA: EXPORT TAXES, EXPORT UNIT VALUES, EXPORT VOLUtES, PRODUCER PRICES AND PROOUCTION FOR MAJOR EXPORTERS, 1980-84 Export Tax Index of Export Index of Real b/ Production Exports Value of Export as Percent of Unit Value Producer Prices (Tons) (Tons) USS'Ooo Export Unit Value Real a/ Nominal Brazil 1980 55 100.00 100.00 100.00 296,000 123,580 291,690 81 55 81.30 81.70 74.65 349,000 125,246 240,420 82 55 64.34 63.78 54.85 314,000 143,462 217,940 83 20 81.55 78.70 96.35 336,000 152,773 294,070 84 20 103.77 98.38 133.60 346;000 107,289 262,790 Cote d'lvoire c/ 1980 23 100.00 100.00 100.00 376,000 283,678 794,410 81 23 59.50 59.80 92.00 403,000 438,395 730,900 82 23 55.13 54.63 85.50 456,000 326,432 503,990 83 23 54.58 52.66 91.00 355,000 286,382 437,620 84 23 75.34 71.42 92.40 405,000 390,000 822,780 Ghana 1980 70 100.00 100.00 100.00 296,000 194,679 655,921 81 70 61.25 61.56 61.58 258,000 191,503 395,240 82 70 47.86 47.43 113.30 225,000 239,931 386,870 83 70 48.14 46.44 76.20 178,000 153,397 248,700 84 70 55.14 52.26 77.00 188,000 142,000 263,701 Nigeria 1980 50 100.00 100.00 100.00 169,000 133,861 243,390 81 50 79.24 79.63 88.40 155,000 194,567 280,290 82 50 90.57 89.75 82.10 181,000 136,656 225,030 83 50 87.17 84.12 70.48 156,000 170,000 269,430 84 50 104.43 98.99 52.00 115,000 108,500 206,010 Cameroon 1980 40 100.00 100.00 100.00 122,000 82,764 210,842 81 40 68.94 69.28 93.26 120,000 82,580 145,030 82 40 73.56 70.71 85.68 122,000 68,983 125,400 83 40 67.08 64.73 84.00 106,000 80,052 136,790 84 40 89.36 84.70 80.42 115,000 106,829 243,160 a/ Index based upon prices deflated by MUV b/ Index based upon prices deflated by local CPI. c/ The current rate of export tax is 25.2S of the reference price. - 24 - Table 9: COCOA: INDICES OF WORLD EXPORT UNIT VALUE AND WORLD PRICES World Export Unit Value World Price Real a/ Nominal Real b/ 1980 100.00 100.00 100.00 81 66.25 66.56 79.52 82 59.13 59.6i 67.07 83 63.62 61.39 84.84 84 81.14 76.92 96.78 a/ Based upon price deflated by MHU. b/ Based upon ICCO price deflated by MUV. bush fires. Consequently, the demand for Brazilian cocoa increased, bidding up the export unit value for Brazil. In 1983, the export unit value for all other major suppliers declined relative to the 1982 level. From Tables 8 and 9 it can be seen that the export unit value for Brazii is correlated with the world (ICCO) price of cocoa. This price correspondence can be explained by the timing of Brazilian shipments of cocoa to the world market. Brazilian cocoa is harvested twice a year; hence the supply to the world market is evenly distributed. On the other hand, output from the African countries is more skewed; it comes mostly at the end of the year and in the early months of the following year. Moreover, Brazil sells in the spot market while other countries are engaged in forward selling. 33. It is observed that after the reduction in its export tax, Brazilian export revenue increased. Between 1982 and 1983, the value of cocoa exports from Brazil increased by about 35X. Existing taxes in Ghana, Nigeria and Cameroon are much higher than the optimal. A reduction in the tax rates of - 25 - these countries might, in fact, increase their tax revenues. This is particularly true for Ghana, which has imposed the largest tax on its exports and has been experiencing a steady decline in its export revenues. (ii) Tea 34. The import demand elasticities for major exporters of tea are given in Table 10 together with the optimal export tax estimates. Table 10 TEA: IMPORT DEMAND ELASTICITIES FACING M4AJOR SUPPLIERS AND THEIR OPTIM1AL EXPORT TAXES Export Taxes (Percent) Import Demand Elasticities Optimal Tax Short-run a/ Long-run b/ Actual c/ Without Discount Rate With Discount Rate Short-run Long-run Short-run Bangladesh -10.9 -54.9 nil 4.5 0.9 5.5 China -2.7 -13.2 n.a. 18.2 3.8 d/ India -1.4 -6.2 nil 36.4 8.0 43.7 Indonesia -4.4 -21.4 nil 11.5 2.3 13.8 Kenya -3.3 -17.6 10 to 15 e/ 15.0 2,8 19.0 Malawi -9.0 -44.9 10 5.5 1.1 6.8 Sri Lanka -1.8 -7.6 10.36 28.3 6.6 35.7 a/ Based on a short-run world demand elasticity of -0.2 and short-run rest-of-the-world supply elasticities from Table 1. b/ Based on a long-run Import elasticity of -0.4 and long-run rest-of-the-world supply elasticity of 1.5. c/ Refer to Annex 2. d/ There Is no avallable measure of the discount rate for China. e/ 10% export tax appiles to Preferential Trade Area countries, while about 15% applies to nonpreforential Trade Area Countries. 35. Export taxes imposed by these countries are low to zero. The tax policies followed are consistent with the optimal taxes applicable under long- - 26 - run elasticity assumptions where tax rates are all less than 10X. However, under short-term assumptions, India and Sri Lanka would be justified in raising their taxes significantly, but because of their level of development they should not be under any pressure to move towards such a policy. In fact, in 1986 Sri Lanka lowered its export tax close to the long-run optimal tax. In 1986 Malawi also moved to its long-run optimal rate by abolishing its tax. As Chinese pricing policy is not clearly understood, it is difficult to say whether they would be justified in raising or lowering tax rates. 36. The export tax levied by Sri Lanka has been declining as a p2rcentage of the export unit value for tea over the period 1980-84, therefore it is of interest to see what has been the impact of this change on its export prices, producer prices and export revenues. 37. From the data set out in Tables Ila and lib for the 1980-84 period, Sri Lanka's export price has not been affected by changes in export taxes in the way expected. World prices have increased as the export tax has declined. The producer price, on the other hand, increased sharply as the tax declined. Both production and exports initially fell in 1983 but increased sharply in 1984. However, because 1984 performance was influenced by the boom in tea prices in that year it would be difficult to attribute any response to export tax changes in Sri Lanka. (iii) Coffee 38. The import-demand elasticities facing each major coffee exporter have been calculated and are shown in Table 12 together with estimates of the export taxes on coffee in these countries in 1985 and estimates of the optimal taxes under various assumptions. Under short-term elasticity assumptions Table Ile: TEA: EXPORT TAXES, EXPORT UiNIT VALUES, EXPORT VOLUiMES, PRODUCER PRICES AND PRODUCTION FOR SRI LAKA, 1980-84 Export Tax as Export Unit Producer Price Value of Percent of Value Index Index Production Export Volume Exports Export Unit Value Real a/ Nominal Real b/ Nminal (tons) (tons) (US S'000) Sri Lanka 1980 22.47 100.00 100.00 100.00 100.00 191,375 184,728 372,156 81 23.44 9(%28 90.71 83.81 98.85 210,148 183,362 335,089 82 20.77 84.24 83.52 102.50 134.00 187,816 181,215 304,897 83 13.81 116.22 112.11 168.99 252.00 179,287 157,938 356,720 U4 10.36 169.60 160.81 186.00 324.00 230,000 204,471 662,445 Table lib: TEA: IFNICES OF WORLD EXPORT UNIT VALUE AD WORLD PRICES 9 1 World Export Unit Value World Price Real a/ Nominal Real a/ NomInal 1960 100.00 100.00 100.00 100.00 1981 95.76 96.21 90.14 90.57 1982 89.11 88.35 87.32 86.58 1983 103.16 99.92 108.45 104.61 1964 140.67 133.44 163.38 154.96 a/ Index base upon prices deflated by MJUV b/ Index based upon prices deflated by local CPI. - 2- Table 12: COFFEE: IMPORT DE4MND ELASTICITIES FACING MAJOR SUPPLIERS AND THEIR OPTIMAL EXPORT TAXES Export Taxes (Percent) Import Demand Elasticities Optloal Tax Short-run a/ Long-run b/ Actual c/ Without Discount Rate With Discount Rate Short-run Long-run Short-run Brazil -1.2 -4.9 22.0 60.0 15.0 75.0 Colombia -2.4 -10.5 6.5 30.7 7.0 42.1 C6te dlivoire -5.0 -25.5 25.0 14.8 2.9 17.0 Kenya -14.8 -73.7 15.0 5.0 1.0 5.9 a/ Based on a short-run world Import demand elasticity of -0.17 and short-run rest-of-the-world supply elasticities from Tablo 1. b/ Based on a long-run import demand elasticity of -0.23 and a long-run rest-of-the-world supply elasticity of 1.5. c/ Tax rates In force in 1985, see Annex 2. Brazil and Colombia would be justified in increasing their export taxes considerably. In Brazil's case the Government would take up to 75X of export prices compared to its present tax of about 20Z. Colombia would collect up to 40X of export receipts compared to the present tax of below 1OZ. The trade-off between short- and long-run revenue collections becomes very marked in the case of these two countries. Under long-run elasticity assumptions the optimal tax for Brazil is 15X and for Colombia it is 71. Their present taxation policies are close to the optimal long-run tax. 39. Under long-run elasticity assumptions optimal tax rates for Cote d'Ivoire and Kenya are near to zero. Because of the highly elastic demand faced by Kenya, its existing tax level is well above the optimal under even short-run elasticity assumptions. CMte d'Ivoire's tax rate is also well above its optimal rate even on short-term assumptions. - 29 - 40. Since 1980, coffee exports have been subject to control under the International Coffee Agreement's global export quota. Each expotting member country is allocated a share of this quota. The main expressed purpose of the Agreement is price stabilization. However, inasmuch as the export control is used to attempt to raise average coffee prices, the question arises as to the consistency of any export tax imposed with the quota held by the country. For example, the tax imposed could be so high as to prevent the quota from being filled. We do not go into this question. 41. It should be noted that both Brazil and Colombia are economies that are experiencing very high rates of inflation. Hence the estimates of optimal taxes taking into account current discount rates, may be unduly magnified. (iv) Natural Rubber 42. The elasticities of demand faced by the four major natural rubber exporters are presented in Table 13, together with the optimal tax estimates. 43. If short-run elasticities are considered, the results suggest a case for the imposition of an export tax on rubber exports for all exporters, with the exception of Sri Lanka. In the short-run case, where Malaysia's foreign demand elasticity is -1.2, the tax that maximizes short-term revenues from rubber exports is as high as 35X of the export price. The rate at which Malaysia taxes its exports has been declining over time. In 1984, the export tax was only about 4Z of the export unit value, which is well below the optimal level estimated from the short-run import demand elasticities. Malaysia, however, may be adjusting to its long-run situation, which appears reasonable given its lessened reliance on the tax for government revenues and given the threat to the nal iral rubber industry from synthetics. Moreover, with Malaysia's share of the export market expected to steadily decline as Indonesia's and Thailand's shares increase, its optimal tax rate will decline. - 30- Table 13: NATURAL RUBBER; IMPORT DEMAND ELASTICITIES FACING MAJOR SUPPLIERS AND THEIR OPTIMAL EXPORT TAXES Export Taxes (Percent) Import Demand Elasticities Optimal Tax Short-run a/ Long-run b/ Actual c/ Without Discount Rate With Discount Rate 1980 1984 Short-run Long-run Short-run Indonesia -2.2 -8.0 5.0 0.0 16.0 4.5 20.6 Malaysia -1.2 -4.3 23.0 4.0 30.6 8.3 35.0 Sri Lanka -18.6 -70.6 53.4 30.5 1.9 0.5 2.6 Thailand -4.0 -14.6 20.0 9.0 8.9 2.4 11.7 a/ Estimated with a short-run world demand elasticity of -0.27 and short-run rest-of-the-world supply elasticities from Table 1. b/ Estimated with a long-run world demand elasticity of -0.76 and long-run supply elasticities for the rest of the world of 2.0. c/ See An,iex 2. 44. Indonesia abolished its tax on rubber exports in 1981. Calculation of the optimal tax from the short-run world import demand elasticity estimate of -0.27 shows that in the short run a tax of up to 21Z of the export unit value can be justified. In the long run the optimal tax rate is 4.5X. However, Indonesia's export share has been increasing and is expected to continue to increase so that its optimal tax rate will increase. 45. Based on its short-run import demand el2-ticity the existing tax in Thailand is almost the same as the optimal export tax. However, taking a long- run view its optimal export tax should be near zero. Even on the basis of the short-term elasticity of import demand, the optimal tax on exports from Sri Lanka is close to zero. Therefore, there appears to be no "optimal tariff" argument for the large tax being applied (although it declined substantially over the 1980-84 period). Over the long run, a tax of such a magnitude must have a damaging effect on its exports. These have in fact been on a declining trend for the past two decades. - 31 - 46. Given the domination of the world rubber market by Indonesia and Malaysia, it is of interest to examine the interrelationships between their export taxes and producer prices, production and export revenues. 47. From the data in Tables 14a and 14b below it is likely that the short-run effect on the export unit values and world prices of a reduction in export taxes is fairly substantial. The reduction of the export tax by Malaysia from 23% to 14% between 1980 and 1981 is associated with in a decline in the unit value of Malaysian exports by 22Z. A further decline of the tax from 14% in 1981 to 4% in 1982 is associated with a further decline in the export price to 40% below its 1980 level and 23% below its 1981 level. Similar observations can be made for Indonesia. The unit value of Indonesian exports declined by 25.3% in real terms in 1982 after the tax was abolished. However, export unit values increased in 1983 in nominal and real terms for both Malaysia and Indonesia. The rate of increase was greater for Malaysia (25%) than for Indonesia (22%); the difference may be explained by the fact that Malaysia's export tax increased during that time from 4% to 7%. World prices display a similar tendency. For instance, the world export unit value, the Singapore spot price and the New York dealer price all declined in the 1980-82 period by about 40% in real terms and rose again in 1982. However, a relation- ship between export taxes and domestic producer prices cannot be observed from the data. One would expect that as a result of lower taxes, producer prices would rise--at least in the short run. Movements in real producer prices in Malaysia and Indonesia, however, show a pattern similar to the export price, i.e., declining with lower taxes and increasing with higher taxes. A comparison of prices between 1981 and 1982 (the year when the Indonesian tax was eliminated and the Malaysian tax was cut sharply) shows that the decline Table 14a: NATURAL RUBER: EXPORT TAXES, EXPORT UNIT VALUES, EXPORT VO,UMES, PRODUCER PRICES AND PRODUCTION FOR MALAYSIA AND INDONESIA, 1980-84 Export Tax as Export Unit a/ Producer Price b/ Production Exports Value of Exports Percent of Export Value Index Index ('000 tons) (00( Mt) USS 000 Unit Value Real c/ Nominal Real d/ Nominal (Constant 1980) c/ Malaysia 1980 23 100.00 100.00 100.00 100.00 1,530.00 1,525.77 2,121,394 81 14 77.74 78.13 73.70 81.00 1,510.00 1,483.99 1,604,100 82 4 59.80 59.35 62.30 72.40 1,494.00 1,376.11 1,147,500 83 7 75.30 72.66 79.80 76.00 1,563.70 1,562.77 1,635,800 84 4 75.90 72.00 72.00 90.00 1,529.00 1,588.50 1,676,200 Indonesia 1980 5 100.00 100.00 100.00 100.00 1,020.00 980.70 1,173,810 81 5 85.40 85.88 75.25 80.60 867.00 812.56 831,250 82 zero 63.81 63.24 55.00 65.50 880.00 801.43 612,450 83 zero 78.00 75.27 67.70 87.20 997.20 941.35 878,660 84 zero 82.60 78.28 57.20 84.00 1,115.60 1,013.60 1,002,100 a/ Index based upon export unit value In US dollars. b/ Index of farm-gat price in local currency. cD Cefleted by MUV dX Deflated by local CPI. Table 14b: NATURAL RUCOER: INDICES OF NORLD EXPORT UNIT VALLE AND WORLD PRICES World Prices: RSS 1 World Export a/ Singapore New York Unit Value (F.0... Buyers' Closing Spot) Real bl NomInal Slngapore S U.S. S Real b/ Nominal Real b/ Nominal 1960 100.00 100.00 100.00 100.00 100.00 100.00 100.00 1961 81.70 82.00 75.42 84.08 84.50 77.98 77.37 1962 61.35 60.80 59.38 68.87 68.25 62.38 61.72 1963 73.75 71.20 73.70 91.67 88.46 78.98 76.22 1984 74.70 70.80 65.66 86.69 82.18 71.30 67.96 a/ Index based upon export unit value In U.S. dollars. _.' Deflated by NUV. - 33 - in the Malaysian producer price was less than the decline in export price. or the decline in Indonesia's producer price. Hence, theMalaysian producer price relative to the world price increased during this period. The rate of decline of the producer price in Indonesia is comparable to the rate of decline of its export unit value in real terms, i.e., about 26%. In nominal terms, however, the export unit value fell by about 26% and the domestic producer prices fell by only 19%. It seems, therefore, that producer prices respond to changes in export taxes with a lag. Hence, short-term relationships between changes in output, changes in producer prices and changes in export taxes should be interpreted with caution. 48. An analysis of the short-run effects of reductions in export taxes on real producer prices and production is presented for Malaysia and Indonesia below. Rates of Changes in Percentage Export Tax Real Prices Production Malaysia 1981-82 -71 -15.4 -1 1982-83 +75 +28 +4.5 1981-83 -50 +8.3 3.5 Indonesia 1981-82 5 to zero -26.7 +1.5 1982-83 - +19.0 +13.3 1981-83 - +12.7 +14.9 1982-84 - +4.00 +26.00 49. Over the period 1981-83 the export tax in Malaysia was reduced by 50%, the producer price increased by 8.3Z and production increased by about 3.5Z. Output appears to be more responsive to changes in the producer price in - 34 - Indonesia. Elimination of the export tax in Indonesia is associated with a 41 increase in the producer price, while output increased by 26X. The producer price response to changes in export taxes also appears to be greater in Indonesia than in Malaysia. 50. It appears from the data presented above that the short-run effect of a reduction in export taxes on export revenues has been in the direction of reducing the total revenues from exports. In the case of Malaysia, a reduction of the export tax from 231 in 1980 to 14X in 1981 and 4X in 1982 is associated with a loss of export revenues of 241. 1/ This period, however, is characterized by a general decline in exports from Malaysia and Indonesia. Between 1980 and 1982, exports from Malaysia declined by 9.71 and from Indonesia by about 18X. The decline in total world exports during this period was about 6.8X and that of world production was about 2.61. 51. The huge loss of export revenues may have justified export taxes in the short term. On the assumption that the short-run demand and supply elasticities are very low, and that demand for exports does not change in the short run, application of optimal taxes of 20.6% on Indonesian exports and 351 on Malaysian exports should have led to export revenues frcm natural rubber for 1982 being about 201 higher for Indonesia and about 301 higher for Malaysia. Indonesian export revenues would have been fairly close to the actual revenues in 1981 with an export tax of about 281. The revenues collected by Malaysia with a 351 tax on its exports for 1982 would still be only about 61 lower than the actual revenues collected in 1981. These results 1/ Malaysia has been diversifying its export sector. The loss of export re"enue from rubber is being compensated by increases in revenues from palm oil exports. - 35 - are based upon the actual 1982 export figures and should be interpreted with caution. However, in the long run, it is clear that the no-tax situation is almost as good as the taxed situation in terms of export revenues. It is seen that the value of exports in 1984, though lower than that of 1980, is higher than any other year when the tax was in existence. In fact, both the volume of exports and the value of exports in real terms for Malaysia aid Indonesia have been steadily increasing since 1982--the year after which the tax on Malaysian exports was reduced considerably and was completely eliminated on exports from Indonesia. - 36 hAnex I Derivation of Import Demand Elasticities Facing Individual Ezporting Countries 1. The demand for commodity i facing country j (D i ) is identically the difference between the sum of the total world demand for that commodity (z D.) except country j and the sum of the quantity supplied by all other 1 exporters to the world market (r o The relationship is presented as follows: D E D - £ Sw (1) row i By differentiating the above identity with respec, to the price of the commodity i, Pi, we get: aDi/api = (aDiIaPi) - row (asiow/ap.) (2) Since the elasticity of demand is given as: ni ' aDi/aPi . Pi/Di (3) by multiplying and dividing both sides and rearranging equation (2) becomes: aDi3/aPi P IDi = E(P /Di aD6I/Pi DI/DW) (4) row (P /Di aBow/aPi . S8ow/Srow) - 37 - nti = *ii - S. r/Dw . (i) 11 1 i 1i I 1 11 where eOw = the elasticity of supply of the rest of the world since 3113 D"I/Dj = 1I/ = (the market share of the j th country) Then the elasticity of demand for commodity i facing country j is presented as follows: X row '. 11w i row t i tii ~~~~~~~~~~~(61 or i w rii- ow irow (7) 11 11 1 3 - 38 - Annex 2 Details of Rxport and Other Com odity Taxes for Cocoa, Coffee, Tea and Natural Rubber Export Restrictions and Taxes (i) Cocoa 1. Until recently, export of cocoa beans was the sole responsibility of the Cocoa Board in Nigeria. The Cocoa Marketing Board has been abolished. Rach private exporter must now obtain an export license from the Nigerian Government. Export licenses are issued on presentation of confirmed letter; of credit from banks and foreign buyers. The relative ease of obtaining export licenses is expected to reduce smuggling. (ii) Tea 2. Effective November 14, 1984, the export duty on all types of teas exported from Sri Lanka, except tea bags, was reduced by Rs2/kg. Further reductions were implemented on November 14, 1986. The export taxes on various types of teas are presently as follows: Bulk and green tea Rs5/kg Packeted tea Rs3/kg Instant tea RslO/kg Tea bags RsO*5/kg Based upon an exchange rate of SL rupees 27 per US dollar, the existing average tax on all types of tea is calculated to be about 15X ef the Colombo gross auction price and about 9% of the London auction price. - 39 - 3. Sri Lankan tea exports are also subject to a Tea Board Cess, payable at the point of export by the exporter. In November 1984, the cess was raised by 25 cents to SL Rsl.50/kg ($0.059). Exports are also subjected to a Medical Aid Cess leviable at 0.0035 cents/kg and the proceeds are given to the Health Department. 4. Sri Lankan exporters of value-added forms of tea are given export incentives in the form of cash subsidies under the Export Development Board Expansion Grant Scheme. The rate of cash subsidy on tea bags, tea packets, instant tea and green tea are 4%, 3%, 4% and 3X of the f.o.b. value. 5. The following are the current export duties on tea exported from Kenya to its preferential trade area (PTA) countries and nonpreferential trade area (NPTA) countries. Average price per ton PTA NPTA --- - ----2-z--------- KL 1,000 or less Nil Nil > KL 1,000 < KL 1,500 7.0 10.0 > KL 1,500 < KL 2,000 8.75 12.5 > KL 2,000 < KL 2,500 10.5 15.0 > KL 2,500 < KL 3,000 12.25 17.5 > KL 3,000 < KL 3,500 14.0 20.0 > KL 3,500 17.5 25.0 6. Duty on tea exported from India was abolished with effect from February 14, 1979. The Government of India allows full rebate of excise duty on all tea export sales. The rate of subsidy is 10% of the FOB value of tea - 40 - bags and Darjeeling tea exported in caddies and packets, and 0l for instant tea subject to various conditions. However, tea production and marketing is subjected to very heavy taxation by the federal and state governments. 7. Indian tea exports have recently been subject to quota restriction which was 220,000 tons for 1985. Every contract for export of tea has to be registered with the Tea Board within a specified period from the date of its conclusion. Previously, there was . minimum export price restriction which, according to the tea industry, was acting as a major constraint in increasing tea exports. This restraint was abolished from August 12, 1985, due to oversupply of tea and a steep decline in the tea price in the international market. 8. As of March 23, 1985 the export duty on tea from Malawi was 10X of the f.o.b. price. The tax was abolished on April 1, 1986. (iii) Coffee 9. The Brazilian Coffee Institute's (IBC) recent resolutions regarding export taxes are the following: a. Resolution 2/86: Provides that the value of the export tax be calculated on the basis of the minimum export price set by IBC and not on the effective export sales price of coffee. b. Resolution 5/86: Reduces the value of the export tax applicable to exports of type 6 Arabica coffee from 33Z to 151 of the minimum export price set by IBC. c. Resolution 7/86: Reduces the value of the export tax applicable to exports of the type 7 Arabica coffee with Rio zone flavor from 33X to 25Z of the minimum export price set by IBC. - 41 - d. Resolution 9/86: Reduces the value of the export tax applicable to type 7 Robusta coffee from 331 to 251 of the minimum export price set by IBC. 10. In Colombia, coffee is the only commodity where exports are levied with taxes and other charges. Most of the other commodity exports are encouraged by an export rebate (CERT). There is an ad-valorem export tax on coffee the equivalent of 6.5X of the "Repatriation Requirement" (locally known as "Reintergo"). Of the tax, 4.5Z of the funds are channeled to the national coffee fund, while the remaining 21 goes to the national treasury. The repatriation requirement is defined as the minimum price in US dollars per each 70 kg bag of green coffee exported. 11. In C8te d'Ivoire the export tax on coffee and cocoa is fixed at 100 CFA/kg based upon the reference price. 12. The Government of Kenya levies export taxes on coffee based on auction prices in excess of KL 1,000 per ton. (No other export commodities are not taxed.) Export taxes were introduced during the 1977-79 coffee boom as an additional source of incime for the Government. In addition, the local district governments levy cesses on coffee for improvement of roads and running of local offices in their respective areas. 13. The current rates of export taxes aret Prices KL/ton X Rate of Duty Before 1,000 h.l Next 500 10 Next 500 12h Next 500 15 Next 500 17½ Next 500 20 Over 3,500 25 - 42 - (iv) Natural Rubber Research and Replanting Cesses (Presented as Z of Total Rubber Export Revenues) Malaysia Thailand 1970 8.8 5.8 1975 6.7 5.3 1980 8.5 5.2 1981 9.3 4.8 1982 7.0 5.2 1983 5.6 5.6 1984 5.6 5.2 1985 6.5 5.6 Source: Ministry of Finance, Customs Department and other government documents. - 43 - REPFtENCIB Akiyama, T. and A. Bowers (1984), "Supply Response of Cocoa in Major Producing Countries," Commodity Studies and Projections Division Working Paper No. 1984-3, The World Bank. Akiyama, T. and R.C. Duncan (1982), "Analysis of the World Coffee Market," World Bank Staff Commodity Working Paper No. 7. Akiyama, T. and P.K. Trivedi (1987), "A Global Tea Model," World Bank Staff Commodity Working Paper No. 17. Bateman, M.J. (1965), "Aggregate and Regional Supply Functions for Chanaian Cocoa, 1946-1962," Journal of Farm Economics, 47:384-401. Behrman, J.R. (1968), "Monopolistic Cocoa Pricing," American Journal of Agricultural Economics, 50:702-19. Ford, Derek J. (1971), "Long-Run Price Elasticities in the Supply of Kenyan Coffee: A Methodological Note," Eastern Africa Economic Review, 3:65-67. Grilli, E., R. Helterline and P. Pollak (1981), "An Econometric Model of the World Rubber Economy," World Bank Staff Commodity Paper No. 6. Maitha, J.K. (1970), "Productivity Response to Price: A Case Study of Kenyan Coffee," Eastern Africa Economic Review, 2:31-37. Repetto, R. (1972), "Optimal Export Taxes in the Short and Long Run, and an Application to Pakistan's Jute Export Policy," The Quarterly Journal of Economics, 396-406. Tan, C. Suan (1984), "World Rubber Market Structure and Stabilization: An Econometric Study," World Bank Staff Commodity Working Paper No. 10. Wickens, M.R. and J.N. Creenfield (1973), "The Econometrics of Agricultural Supply: An Application to the World Coffee Market," Review of Economics and Statistics, 55:433-440. PPR Working Paper Series Title Author Date Contact WPS1 Imports Under a Foreign Exchange Cristian Moran March 1988 C. Hambidge Constraint 61539 WPS2 Issues in AdJustmeot Lending Vinod Thomas March 1988 C. Hambidge 61539 WPS3 CGE Models for the Analysis of Trade Policy in Developing Countries Jaime de Melo March 1988 C. Hambidge 61539 WPS4 Inflationary Rigidities and Stabilization Policies Miguel A. Kiguel April 1988 M. Kiguel Nissan Liviatan 61761 WPS5 Comparisons of Real Output in Manufacturing Angus Maddison April 1988 E. Zamora Bart van Ark 33706 WPS6 Farm-Nonfarm Linkages in Rural Sub- Saharan Africa Steven Haggblade April 1988 C. Spooner Peter B. Hazell 37570 James Brown WPS7 Institutional Analysis of Credit Cooperatives Avishay Braverman April 1988 C. Spooner J. Luis Guas'.h 37570 WPSS Prospects for Equitable Growth in Rural Sub-Saharan Africa Steven Haggblade April 1988 C. Spooner Peter B. Hazell 37570 WPS9 Can We Return to Rapid Growth? Andrea Boltho June 1988 J. Israel 31285 WPSIO Optimal Export Taxes for Exporters of Perennial Crops Mudassar lmran June 1988 A. Kitson-Walters Ron Duncan 33712 WPSII The Selection and Use of Pesticides In Bank 7inanced Publ:c Health Projects Bernhard Liese June 1988 C. Knorr Norman Gratz 33611