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POLICY RESEARCH WORKING PAPER 28 82 Politically Optimal Tariffs An Application to Egypt Dorsati Madani Marcelo Olarreaga The World Bank Development Research Group H Trade September 2002 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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I POLICY RESEARCH WORKING PAPER 2882 Abstract Egyptian economic history has been influenced by the identify two sets of products: six products where tariff import-substitution industrialization approach to cuts will not be politically costly, and six where it will be development, dating back to Gamal Abdel Nasser's Pan- politically costly, In both cases, lowering tariffs will Arabic and socialist movement in the 1950s. Two major improve resource allocation and efficiency in the waves of liberalization have marked the government's industries involved. efforts to rationalize and modernize the economy-the The prospects of a free trade area with Europe should Infitah (opening) promoted by Anwar Sadat in the also help reduce tariffs in sectors where a high share of 1980s, and further trade and privatization efforts by production is exported or imported from Europe. If Hosni Mubarak in the 1990s. Nonetheless, the extent of products are exported to Europe, the potential free trade liberalization does not compare well with similar access to the European market should more than countries. Despite a decade of liberalization, the trade compensate for any tariff reductions in the local market. regime is characterized by deliberate and gradual On the other hand, if products are heavily imported reforms. By 1999 these reforms had led to average tariffs from Europe, the preferential access for European close to 30 percent, with high dispersion and escalation, exporters will tend to significantly increase their well above those in comparable countries. presence in the Egyptian market. This inr turn will reduce Dorsati and Olarreaga provide a political economy the "protective" aspect of external tariffs in sectors with analysis of the difficulties of liberalizing tariffs in Egypt large import penetration as competition will be coming in general, and in its specific industries. They present the from Europe. theoretical and empirical models and discuss the results. The EU-Egypt agreement includes a lengthy (19 years) The authors also explore the potential effects of the structure of tariff reduction. This structure will lead to Euro-Med agreement for Egypt. increased effective rates of protection for the first eight The political economy analysis of the Egyptian tariff years of its implementation, added economic distortions, structure identifies two sets of highly protected sectors. and inefficient use of resources. The Egyptian authorities Overprotected industries are defined as those with actual may want to consider speeding up the Euro-Med tariffs at least 25 percent higher than what is predicted schedule of liberalization to mitigate an increase in by the political economy variables. The political effective rates of protection.
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