The coordinated reform of tariffs and domestic indirect taxes

Tariffs on imports protect domestic producers and raise public revenue. The World Development Report 1987 finds that effective rates of protection to manufacturing in developing countries typically exceed 40 percent; while the World Development Report 1988 estimates that the importance of import taxes in tax revenue is over 20 percent in Asia, sub-Saharan Africa and in the Middle East and North Africa, compared to 2 percent in the industrial countries. These figures clearly show that tariff reform, which is intended to reduce anti-export bias and promote an outward-oriented development strategy, can be viable only if alternative and administratively collectible sources of revenue can be found to offset potential revenue losses. The tradeoff between liberalization and fiscal imperatives is thus frequently central to tariff reform. This paper argues that tariff reform must be seen as part of a broader program of tax reform. The need to adopt such a public finance perspective is argued with reference to selective reviews of country experience with trade liberalization and tax reform, protection and revenue objectives in developing countries and the instruments available to further those policy goals.