Trade liberalisation, balance of payments and tax revenue in Sub-Saharan Africa

Abstract

This thesis examines the impact of trade liberalisation on export growth, import growth, balance of payments and tax revenue of 28 Sub-Saharan African (SSA) countries from 1981 to 2010. Instead of relying on the Dean et al (1994) or Wacziarg and Welch (2008) liberalisation measures, we construct an index of trade liberalisation following a careful examination of trade policy reviews of sampled countries. Also, we adopt the average duties of exports and imports as additional measures of liberalisation. In Chapter two, we examine whether trade liberalisation has led to faster growth of imports than exports in Sub-Saharan Africa using fixed effects and generalised methods of moments estimators. Results show that imports grew faster than exports by approximately two percentage points which gives a preliminary indication that the trade balance of Sub-Saharan African countries declined following the adoption of freer trade policies. In addition, we found a low price elasticity of demand for exports which suggest that exports in the region are still mainly composed of primary commodities. The impact of trade liberalisation on the trade balance and the current account balance of Sub-Saharan African countries is examined in Chapter three of this thesis. Using a Pooled Mean Group estimator, results showed that the implementation of freer trade reforms has led to a deterioration of both the trade balance and the current account balance of SSA countries by 3.5 and 2.5 percentage points of GDP, respectively. In Chapter 4, the relationship between trade liberalisation and tax revenues is analysed for SSA countries using the fixed effects and generalised methods of moments estimators. We found that the reduction in average trade taxes has significantly decreased trade and total tax revenues as percentages of GDP; albeit, marginally increasing domestic tax revenues. Moreover, the removal of quantitative restrictions (that is, the liberalisation dummy) has led to an increase in total tax revenue of Sub-Saharan African countries.