Politically optimal tariffs : an application to Egypt

Egyptian economic history has been influenced by the import-substitution industrialization approach to development, dating back to Gamal Abdel Nasser's Pan-Arabic and socialist movement in the 1950s. Two major waves of liberalization have marked the government's efforts to rationalize and modernize the economy-the Infitah (opening) promoted by Anwar Sadat in the 1980s, and further trade and privatization efforts by Hosni Mubarak in the 1990s. Nonetheless, the extent of trade liberalization does not compare well with similar countries. Despite a decade of liberalization, the trade regime is characterized by deliberate and gradual reforms. By 1999 these reforms had led to average tariffs close to 30 percent, with high dispersion and escalation, well above those in comparable countries. provide a political economy analysis of the difficulties of liberalizing tariffs in Egypt in general, and in its specific industries. They present the theoretical and empirical models and discuss the results. The authors also explore the potential effects of the Euro-Med agreement for Egypt The authors provide a political economy analysis of the difficulties of liberalizing tariffs in Egypt in general, and in its specific industries. They present the theoretical and empirical models and discuss the results. The authors also explore the potential effects of the Euro-Med agreement for Egypt. The political economy analysis of the Egyptian tariff structure identifies two sets of highly protected sectors. Overprotected industries are defined as those with actual tariffs at least 25 percent higher than what is predicted by the political economy variables. The political determinants can be divided into two groups: the lobbying and counter-lobbying forces. First, the lobbying strength of specific capital in each sector is proxied by the degree of industry concentration, the labor-capital ratio, and the import penetration ratio. Second, counter-lobbying in factor or input markets is proxied by wage level, degree of processing in the industry, and degree of intra-industry trade. Using this methodology, the authors identify two sets of products: six products where tariff cuts will not be politically costly, and six where it will be politically costly, In both cases, lowering tariffs will improve resource allocation and efficiency in the industries involved. The prospects of a free trade area with Europe should also help reduce tariffs in sectors where a high share of production is exported or imported from Europe. If products are exported to Europe, the potential free access to the European market should more than compensate for any tariff reductions in the local market. On the other hand, if products are heavily imported from Europe, the preferential access for European exporters will tend to significantly increase their presence in the Egyptian market. This in turn will reduce the"protective"aspect of external tariffs in sectors with large import penetration as competition will be coming from Europe. The EU-Egypt agreement includes a lengthy (19 years) structure of tariff reduction. This structure will lead to increased effective rates of protection for the first eight years of its implementation, added economic distortions, and inefficient use of resources. The Egyptian authorities may want to consider speeding up the Euro-Med schedule of liberalization to mitigate an increase in effective rates of protection. Furthermore, special effort should be made to reduce external tariffs on semi-processed and processed goods to attenuate the expected negative effects of the rise in effective rates of protection. More generally, to prevent the high potential for trade diversion associated with Egypt's high tariffs, a simultaneous reduction in Egypt's external tariffs should accompany the EU-Egypt agreement.