A study of the effects of tariff reform and import liberalization on the flour and flour-based products industries
Date
1987-03
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Abstract
This paper aims to study the firm-level effects of tariff reform and import liberalization on the flour and flour-based products industries (i.e., biscuits and noodles) in 1980-1985 and the resultant changes made by these firms in view of these programs to determine policy measures necessary to facilitate and ease adjustment. A survey of firms was conducted and data gathered were supplemented by information from the firms' financial statements, annual reports and from statistics of various government agencies.
Two sets of estimates for effective protection rates (EPRs) and domestic resource costs (ORCs) were done for 1980, 1982 and 1984. The first set of estimates, using tariff and tax rates as deflator to get border prices, showed that the surveyed flour mills enjoyed average protection rates of 90% in 1980, 111% in 1982 and 92% in 1984. The second set of estimates, using actual border prices, showed that all the flour mills were actually being penalized, with average EPRs ranging from -49% to -76%. This was due to state-trading of wheat grain and government control on prices and sale of wheat and flour resulting in lower flour prices and higher wheat prices than free-trade prices. For the flour-based products, the first set of estimates for biscuit and noodle firms showed decreasing EPRs from 1980 to 1984 as a
direct effect of tariff rate reduction while the second set of estimates showed increasing EPRs for the same firms.
The respondent firms in the flour milling industry claimed that too much government control was the industry's main problem. Because of government controls on import quantities, distribution and prices, including the right to approve or suspend mill operations, the industry has not been able to respond quickly to opportunities to buy wheat at low prices, and the industry's capacity to adjust efficiently to changing business conditions has weakened.
Despite the negative protection rate accorded to the indus- try, however, the DRC/SER average (domestic resource cost/ shadow exchange rate) indicated a high social profitability implying that the industry is efficient and competitive. Adjustment policies towards tariff reforms and import liberalization seem to be unnecessary to the flour milling industry.
The performance indicators of the biscuit firms show that the firms have problems adjusting to tariff reform and import liberalization. A possible recommendation is to institute a graduated scheme of import liberalization for competing products to give local firms more time to adjust to the effects of the Tariff Reform Program. The government should assist in finding alternative export markets to make up for the loss in the share in the domestic market once competing imports enter. Firms should also be encouraged to diversify horizontally.