Import demand and non tariff barriers : an application to Morocco

IMPORT DEMAND AND NON TARIFF BARRIERS AN APPLICATION TO MOkOCCO Giuseppe Bertola (M.I.T.) and Riccardo Faini Division Working Paper No. 1987-2 January 1987 Country Analysis and Projections Division Economic Analysis and Projections Department The World Bank We would like to thank E. Grilli, N. Rossi and the participants to the EPDCO workshop at the World Bank for very helpful comments and suggestions. The World Bank does not accept responsibility for the views expressed herein which are those of the author(s) and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed, the presentation of material, and any maps used in this document are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area, or of its authorities, or concerning the delimitation of its boundaries, or national affiliation.  ABSTRACT The pervasive presence of quantitative restrictions on imports in LDCs make the prediction of import response following trade liberalization a particularly arduous task. It is true that historically estimated elasticities could be of some guidance, even if they did not allow for the impact of QRs, provided that we knew the direction of their bias. In this respect conventional wisdom would suggest that price responsiveness of imports should increase following the liberalization measures. We show in this paper that this is not necessarily the case and, under plausible conditions, the opposite will be true. Drawing on the work of Neary and Roberts (1980), we analyse the demand for imports where quantity restrictions cover only a subset of a given commodity category. The model is then estimated on data from Morocco. The results suggest that quantity restrictions had a significant impact on both the level of imports and their sensitivity to income and price variations. We also discuss some of the implications of our findings for the trade liberalization process in Morocco.  TABLE OF CONTENTS Page No. INTRODUCTION ........... e................. .. ................. .1 THE IMPACT OF RATIONING.. ................................... 2 EMPIRICAL ANALYSIS: THE CASE OF MOROCCO .................... 6 (a) The Evolution of Trade Policy and Flows................6 (b) The Data...... ............** *e*.............. 10 THE RESULTS................................... . .... ...... 11 (a) Imports of Consumer Goods .......................... 11 (b) Imports of Investment Goods.................... .......16 CONCLUSIONS AND POLICY IMPLICATIONS.. ................... 20 REFERENCES...... .... e e ***......... ..............*........ 24 LIST OF TABLES Table 1: Value Share of Imports Subject to Licensing .............. 9 Table 2: Tariff Barriers .......................... 10 Table 3: Imports of Consumption Goods (Linear Expenditure System). ......... .... . .................. .15 Table 4: Imports of Investment Goods (Cobb-Douglas Specification) ............... o .......... ..... 19 LIST OF FIGURES Figure 1: Consumption and Investment Imports ............. 8 Figuer 2: Impact of Lifting Quantitative Restrictions............ o21  INTRODUCTION It is by now widely agreed (Krueger, 1978: Khan and Zahler 1985) that imports flows will respond more rapidly to trade liberalization than exports. This differential response is one of the main justifications used by international organizations like the World Bank to supplement structural adjustment measures with external loans. Accurate prediction of import response to liberalization would then appear to be essential to the design of a structural adjustment package. Insufficient capital inflows would exacerbate any balance of payments problems and may even lead to a later reversal of the trade liberalization policy. On the other hand, an excessive inflow may bring an unwelcome appreciation of the real exchange rate. Unfortunately, the pervasive presence of quantitative restrictions on imports in LDCs make the prediction of import response following trade liberalization a particularly arduous task. Past evidence cannot be relied upon to predict future import flows unless quantitative restrictions are explicitly accounted for. However, non-tariff barriers are usually treated in a fairly cursory function and even more accurate treatments, like the one in Moran (1986), do not permit to isolate the impact of QRs and recover structural behavioural parameters. It is true that historically estimated elasticities could still be of some guidance, even if they did not allow for the impact of QRs, provided that we knew the direction of their bias. In this respect conventional wisdom would suggest that price responsiveness of imports should increase following the liberalization measures. We show in this paper that this is not necessarily the case and, under plausible conditions, the opposite will be true. Estimated elasticities, which  -2- do not allow for the impact of QRs, are therefore an even worse guide to future developments than previously thought. Drawing an the work of Neary and Roberts (1980), we analyse the demand for imports where quantity' restrictions cover only a Lubset of a given commodity category. The model is then estimated on data from Morocco. The results suggest -that quantity restrictions had a significant impact on both the level of imports and their sensitivity to income and price variations. The paper is organized as follows: Section 2 presents a simple m.odel of rationing. Section 3 provides a cursory overview of the evolution of trade flows and policy in Morocco. Econometric specification and results for consumption and investment imports are presented in section 4. The last section offers some conclusions and discusses a few implications of our findings for the trade liberalization process in Morocco. THE IMPACT OF RATIONING We assume that there are two categories of imports, i.e. those subject to licensing and those which can freely enter the country. It is also assumed that the relative border prices among these two commodities stay unchanged. While it would be desirable to dispense with this assumption, available data would not allow us to derive two separate price indices for rationed and non rationed commodities. Consider the following cost function c(V, PD,PM'PC)  -3- where PDI PM and PC denote respectively the price of a domestically produced commodity, of the freely importable foreign commodity and of the foreign good subject to import licensing respectively while V is the level of production (utility). We also have that M= 0 PM PC C where P