Higher import duties to tackle Pakistan’s Balance of Payments (BOP) problem is the wrong advice since it won’t deliver on the intended objective, according to World Bank Senior Economist, Gonzalo Verela.
Higher #import duties to tackle the #BOP problem is the wrong advice. It won't deliver on the intended objective. Why? 🧵👇 https://t.co/2Uravr9BRm
— Gonzalo Varela (@gonwei) April 19, 2022
Pakistan’s widening Current Account Deficit (CAD) is due to Savings/Investment imbalance, and the solution for it entails policies that increase savings, Varela argued in response to an article written by a former federal minister.
Discussing Pakistan’s persistent and large trade deficit in a series of tweets, the trade and macroeconomic researcher highlighted that import duties might be a patch that in the short-run would curb imports, but they will curb exports too, because they increase the profitability to sell at home, so firms shift from export to domestic markets. “Import duties are implicit export taxes. They won’t reduce the CAD,” Varela explained.
The article says: “levy import duties for everything except food and medicine, so (their) prices won’t increase”. Varela argued that the logic is incorrect because of input-output links. He said, “If I tax tractors, food prices will increase (same if oil price increases, all prices down the value chain increase too!)”.
According to the WB economist, import duties “are not just ‘not the solution’. They are a big problem. Why? When levied on inputs, they reduce the productivity of firms, because they reduce their options on how to produce. Higher input tariffs mean less productivity, fewer sales, and lower wages”.
Varela continued to explain that import duties reduce competition, and increase mark-ups (profits) of firms that are domestic-oriented (at the expense of consumers).
Varela added, “Import duties in Pakistan are also anti-poor (as the poor consume more goods than the rich, which are subject to import duties). The poorest decile faces almost double the burden of import duties than the richest decile”.
According to Varela’s findings, import duties don’t address the saving investment problem, but rather discourage exports, lower productivity, lower wages, reduce competition, increase rents to the rich, and are anti-poor.
In his final remarks for Pakistan, Varela acknowledged that import duties are among the highest in the world in Pakistan.
Import duties have been increasing just as exports have been falling, and with it, the trade balance. “They didn’t work before, they won’t work now,” the researcher concluded.
It doesn’t take a WB renowned economist to figure out that balance of payments can’t be bridged by imposing higher taxes, you need to stop imports altogether. Now, govt. needs to be smart and decide what items we can live easily without, and what import items are necessary for our economy. It is as simple as that. The only thing lacking is the will to act.
the article is quite simple taxes are not the solution, import those items which are important for running the economy and for all other items which are less important but useful anyhow must be locally produced in order to avoid imports. this way economy can recover as well as new employment would also be created in the wake of industrialization in the country and could also boost exports.