Do export taxes promote export growth? Evidence from Ethiopia’s leather industry

Abstract

With African economies slowly departing from the emphasis on the theory of comparative advantage, which seemed to imply a policy of continuing exportof primary goods, the interest in exporting processed or value-added products has become quite widespread, leading to questions about the empirical effects of such measures on local industries. The aim of this paper is to analyse the effect of an export tax on the export competitiveness of Ethiopia’s leather industry. The Government of Ethiopia implemented an export tax of 150 per cent on raw hides, skins and semi-finished leather products in 2008. A similar tax rate was placed on crust leather in 2012. According to the Government of Ethiopia these fiscal arrangements would substantially encourage leather goods manufacturing. A Constant Market Share (CMS) model was used to evaluate Ethiopia’s performance in leather products trade in response to these measures. Export value data in 2007 are used as the base year, whereas data in 2013 are used to measure the impact of the export tax. The results indicate that the export tax affected the export of raw hides and skins and unfinished leather products negatively. However, the ramifications of this state policy on exports of finished leather products have been positive. These government policies, thus, worked to increase production and export of value-added leather products at the expense
of local tanneries. The government could, usefully, consider implementing additional policy measures to upgrade the competitiveness of local tanneries.