BY GETACHEW MINAS
Ethiopia has designed and implemented a wave of trade reforms aimed at reducing tariff barriers. To facilitate the liberalization process, it has also invested in infrastructure with the road sector development program.
Studies have analyzed the complementarities between trade and infrastructure reforms and observe if improvements in the quality of roads facilitated the effects of trade liberalization on the performance of firms. They found strong complementarities between the effects of a reduction in input tariffs and road infrastructure.
In other words, trade liberalization can boost firm productivity only if firms have access to good roads. Also a fall in the input tariff is associated with an increase in firm productivity and profitability.
According to WB estimates, “closing the gap” in infrastructure quantity and quality could increase growth of GDP per capita by 2.6 percent per year. Trade liberalization and infrastructure development are effective strategies for economic growth and development. But, the complementarity between the two in generating growth and economic dynamism is not yet fully confirmed.
It is argued that the absence of an efficient infrastructure network can limit gains from globalization, particularly for remote areas. There is a specific concern as the potential benefits from trade liberalization may be hampered by regional disparities in road connectivity and access to main markets.
This exacerbates economic inequality, which remains a looming concern for policymakers in most developing countries, including Ethiopia. According to Atkin and Donaldson, this is especially relevant in a “landlocked,” developing country such as Ethiopia, where international trade “costs” are significantly higher than in advanced economies.
The country has embarked on extensive trade reforms by progressively reducing tariff and non-tariff barriers on imports and exports. This experience is particularly relevant from a policy angle; it requires, however, a plan for infrastructure development with road sector development program.
Improvements in the transport sector undertaken by the Ethiopian government would allow domestic firms, including those in more remote areas, to take advantage of the policy of trade liberalization. This would have important implications for achieving more balanced and equal growth in the country.
The “combined” effects of trade liberalization and infrastructure investment can contribute to accelerate economic development.
Effects of reduction in output tariff: A reduction in tariffs on output produced by a firm increases its productivity. A firm increases its productivity and profitability through increasing its competitive power with better local road infrastructure.
In other words, the competitive effects of tariff reduction on outputs are conditional on the quality of local infrastructure.
Findings confirm the importance of tackling “both” tariff and nontariff barriers to get the most from globalization. But they also imply that gains from globalization are spread unevenly within the country. The quality of infrastructure for most of the towns where firms are located is not “sufficient.”
This situation would not allow local firms to exploit gains from tariff reduction. This has important implications in the Ethiopian context. It requires a strategy for expanding special economic zones both in industry and in agriculture.
Firms, both domestic and foreign, based in the special economic zones largely rely on low trade and infrastructural “costs.”
The re-establishment of the railway connecting Addis to the port of Djibouti will reduce transport costs. It also significantly reduces the travel time, which is a step in the right direction.
Continued investments under the road sector, particularly targeted at peripheral areas, are important to ensure that firms everywhere in Ethiopia are able to tap into international markets. This helps in generating employment and growth in the country. There is also an “unintended effect” of infrastructure development.
Policy makers should also consider lowering non-tariff barriers such as transaction costs involved in moving goods from the border to destination the hinterland.
These efforts might be equally relevant to reducing the costs for firms in local areas within the country for accessing international markets. However, research is needed to examine the role of these factors in ensuring more uniform gains from trade liberalization.
Economic benefits of trade liberalization: Trade liberalization has been shown to benefit developing economies in several ways. According to Bigsten et al, increased competition and better access to intermediate inputs resulting from trade liberalization can spur “innovation” and lead to productivity enhancements.
Productivity lowers product prices that generate welfare improvements for consumers. However, the distribution of gains from trade liberalization is far from uniform within countries and depends on complementary domestic conditions, including the flexibility of labor and credit markets.
The quality of institutions and efficient provision of public goods and infrastructure play important role. Identifying these complementary conditions and the way they shape the effects of trade liberalization is crucial for designing policy.
Studies have examined the complementary role of road infrastructure in determining the impact of input tariff and liberalization on firm productivity. It is argued that roads matter for productivity gains from input tariff liberalization.
Specifically, improved roads “amplify” the impact of a reduction in input tariffs on firm productivity. It boosts the connectivity of a firm to international markets. Overlapping trade and road infrastructure “reforms” make Ethiopia an excellent case.
Tariffs were reduced progressively and continuing into the future with projects to rehabilitate and upgrade the quality of existing roads and to build new ones. The impact of roads to market access, leading to connections between the urban and rural areas is of great economic value.
Roads complement the relationship between input tariff liberalization and firm productivity. With a fall in the input tariff, firms in towns with better roads
see an increase in using new imported intermediate inputs in production. On the other hand, those producers in towns with rough and seasonal roads could not use imported intermediate inputs. They may not benefit from input tariff liberalization.
In other words, rough rural roads impede the benefits that would accrue to producers as a result of tariff liberalization. This situation leads to the conclusion that an economic policy, including trade liberalization of the government, such as “tariff reduction” could be hampered by lack of a complementary program such as “road infrastructure.”
There is also revenue based firm productivity which is related to charged prices. This reflects the complementarity between roads and the impact of input tariff liberalization on revenue-based productivity.
However, this is slightly difficult to ascertain in real terms. The prices charged by firms may not reveal the relations between road and tariffs.
It is argued that gains from an input tariff reduction accrue to firms in towns with better roads, while those with rough roads enjoy no gains. Firms in rural areas where there are no all-weather roads suffer from lack of connections to urban markets.
The business connection is made through middle-men who charge urban consumers high prices for goods. This implies that lack of good road diminishes the value of tariff reduction.
Conclusion: The benefits of the policy of trade liberalization accrue to the consumers only if other conditions are satisfied. The effectiveness of this policy is absolutely dependent on road infrastructure that connects the origin of production with its market destination.
This facilitates trade liberalization without the intervention of other intermediaries. The latter elements inflate the cost of doing business between production and consumer centers, rural and urban hubs. Both producers and consumers lose their gains to the middlemen who pay low prices to producers and charge consumers exaggerated prices.
In this process, the margin of profit is mindboggling, part of it shared by the collaborating bureaucrats in the commerce and transport sectors.
Ethiopia, like any other developing countries is faced with difficulty of implementing its policy of trade liberalization. Its road infrastructure is not fully complementary with the trade policy simply because all rural towns are not interconnected with all-weather roads. This impedes the process of trade between rural and urban centers to the disadvantage of producers and consumers.
The Ethiopian Herald February 4/2021
