Academic journal article The Journal of Developing Areas

Effects of Reducing Tariffs in the Democratic Republic of Congo (Drc): A Cge Analysis

Academic journal article The Journal of Developing Areas

Effects of Reducing Tariffs in the Democratic Republic of Congo (Drc): A Cge Analysis

Article excerpt

INTRODUCTION AND COUNTRY BACKGROUND

Over the past two and a half decades, the Democratic Republic of Congo (DRC), along with several other developing countries, implemented the Structural Adjustment Program (SAP) proposed by the International Monetary Fund (IMF) and World Bank. Since the 1990s when war broke out in the DRC triggered by the control of natural resources, unemployment and poverty have been on the rise in the country. Despite this, ever since the Government Action Plan for Natural Resource Law Enforcement, Governance and Trade was implemented in 1992, the population blamed the SAP for causing the heightened poverty of the 1990s. However, during the reform period it was difficult to point out which policies had an adverse effect on unemployment, poverty and productivity growth. This is because a comprehensive range of policies were implemented, ranging from trade to countercyclical fiscal and monetary policies, exchange rate regulations, demand-side interventions, public employment programmes, employment guarantee schemes, labour-intensive infrastructure programmes, wage and training subsidies, and other specific socio-economic policies, frequently at the same time.

The DRC underwent significant trade liberalisation policy during the 1990s which affected the terms of trade between agriculture and industry, business opportunities, wages, prices and structure of commodities, economic development, and employment within the economic system. However, to the best of our knowledge no study has ever been conducted to assess the general equilibrium effects of trade liberalisation policy in the DRC. Thus, this paper investigates the effects of trade liberalisation in the DRC using our constructed DRC Formal Informal Sector Model (DRCFIM) based on ORANI model of the Australian economy (Horridge, 2005). Trade liberalisation is simulated by tariff reduction on all imported goods and services

Previous studies indicate that various techniques are used to analyse the effects of trade liberalisation on the economy. For instance, Santo-Paulino (2002) estimated the impact of trade liberalisation on export growth in developing countries using dynamic panel data, where he considered the removal of export duties. This econometric analysis also entailed the use of dummy variables to measure before and after trade liberalisation. His findings indicate that export duties as an indicator of trade distortions only negatively affects export growth marginally. On the one hand, trade openness has a strong positive impact on export performance and on the other hand trade liberalisation makes little difference to the sensitivity of exports to real exchange rate changes. Moreover, external demand has a strong positive effect on export growth, and that there is evidence that trade openness increases the sensitivity of exports to income changes.

Studies that do consider formal-informal sector linkages typically focus on tax policies, such as expanding the tax base, or on labor market interactions, such as trade unions' protection of formal employment (Schultz and Mwabu, 1998; Lucas and Hofmeyer, 2001). Such studies do not address formal-informal sector competition in product markets, which may also influence the size and composition of the informal sector, and hence indirectly the high level of unemployment. Using micro simulations, Ianchovichina et al. (2002) measured the extent to which CGE models map factor income to different types of households with view to analyze different policy changes in several developing countries such as DRC and Angola. Starting all tariffs at zero, the results show a decline in most prices of various goods. The return to labour capital stimulated the land to expand and natural resources to contract. This is in line with the huge reserve of land in the DRC. In addition demand increased in sectors where price level fell. Although average income increased, skilled labour wages improved compared to the unskilled. …

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