Incentives for exports : a case study of Taiwan and Thailand

Abstract

Since the 1970s the contribution of exports to growth has become widely recognized. Countries that followed 'outward-looking' development strategies have had stronger economic growth and better income distribution than countries that followed 'inward-looking' development strategies. Given a liberal trade regime, outward orientation will follow. Import-substituting policies, in contrast, impose a tax on exports by increasing prices of inputs to production (raw materials, intermediate goods and services, and machinery) above world market prices and by bidding-up the prices of capital and labour. These increases in production costs cannot be absorbed into higher prices in export industries competing in international markets. The elimination of trade-restricting policies would facilitate exports. But this 'fIrst-best' policy option is usually not regarded as possible on political grounds: groups that benefit from protection are more concentrated and form stronger lobbies than the more numerous but unorganized consumers who would benefit from trade liberalization. Potential exporters are not known. Governments are more sensitive to the perceived short-term cost of trade liberalization than to its long-term benefIts. Export incentives are therefore frequently chosen as a 'second-best' option to offset the _ costs of import substitution and thus make an economy more outward-looking. This study attempts to measure the impact of export incentives on exports of manufactured goods. To avoid the negative effects of high inflation and over-valued exchange rates on export performance, Taiwan and Thailand where these effects were limited, were chosen for case studies. Both economies have had low inflation and stable real effective exchange rates since the 1960s. Both have attempted to offset the negative effect of protection on exports with export incentives.The value of export incentives as a share of total exports is compared for Taiwan In 1969 and Thailand in 1980. In these years the stages of development in the two countries were similar. Protection offsets were the most important incentive for exports in both countries. Protection offsets gradually became more effective over time. They had a positive impact on the percentage change in the value of production and the value of exports in Taiwan between 1969 and 1974, and on the percentage change in the value of production in Thailand between 1980 and 1982. But the statistical test also shows that protection offsets determine only a small share of production and export growth. Production and export grow.th is largely determined by other factors, notably productivity growth. The estimated positive effect of protection offsets is statistically significant, but very small compared with the benefits that would be expected to occur from the reduction or removal of import restrictions. Show more