Incentives for Resource Allocation: FILE COPY A Case Study of Sudan HatuTn tB gC 0 - 03 SWP367 World Bank Staff Working Paper No. 367 December 1979 IAi ERMNATONAL MONETARY FND JOWT UBARY SEP 1 0 1987 INTERNA1IONAL BANK FOR RECONSTRUCIION AND DEVELOPMENT WASHINGTON, D.C. 20161 Prepared by: Shankar N. Acharya Office of t1h'- DeveloprT Copyright © 1979 F ECOPY The World Bank 1818 H Street, N.W. Washington, D.C. 2043 - J The views and interpretations in this document are those of the author and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. The views and interpretations in this document are those of the author and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. WORLD BANK Staff Working Paper No. 367 December 1979 INCENTIVES FOR RESOURCE ALLOCATION: A CASE STUDY OF SUDAN The paper examines the role of a wide range of policy interven- tions -- such as taxes and subsidies on international transactions, exchange rates, import licensing/foreign exchange allocation, export licensing and marketing schemes, domestic excise taxes and price controls -- in determining the overall incentive framework influencing the allocation of resources in Sudan in the mid-1970s. The paper addresses questions such as: -Do policies encourage appropriate choice of economic activities within the major productive sectors of agriculture and industry? - Does the policy framework entail any overall incen- tive bias in favor of agriculture or industry? - Does the structure of incentives imply any pronounced bias in favor of import-substitution activities or exports? On the basis of detailed analysis the paper concludes that the incentive framework confers widely divergent rates of effective protection to different industrial and agricultural activities; that overall the incentive framework is biased against agriculture and in favor of industry; and that it is biased in favor of import substitution and against exports. The paper concludes with a set of policy suggestions for reforming the incentive framework to be more in line with the underlying comparative advantage of the Sudanese economy. Prepared by: Shankar N. Acharya Office of the Vice President Development Policy Staff Copyright t 1979 The World Bank 1818 H Street, N.W. Washington, D.C. 20433 USA (i) Table of Contents Page No. List of Text Tables (iii) I. INTRODUCTION .............................................. I A. Definition and Scope .................................. 1 B. Policy Components of the Incentive Framework .......... 5 C. Main Questions Addressed .............................. 6 II. ELEMENTS OF THE POLICY FRAMEWORK .... ..................... 8 A. The Foreign Trade/Payments Regime ... .................. 8 The Exchange/Tax Subsidy Scheme ........... *......... 8 Import Duties ...... ...................... ........... 9 Foreign Exchange Budgeting/Exchange Control ....... .. 10 Import Licensing ................................. ... 13 Export Duties and Surcharges .... .................... 16 Export Licensing/Export Marketing ... ................ 17 Policies for Invisibles ..... ........................ 19 B. Domestic Price Control Policies .................... O.. 19 Specific Retail Price Controls ...................... 20 General Regulations on Trade Profits .............. .. 21 III. INCENTIVE POLICIES WITHIN INDUSTRY ........................ 23 A. Major Determinants of the Incentive Framework ......... 23 Foreign Trade Taxes, Quotas and Import Bans ...... ... 24 Fiscal Concessions .................................. 24 Infrastructural Incentives .......................... 28 Industrial Licensing ......... .............................. 28 Ex-Factory Pricing ............................ 30 Domestic Excise Taxation ....................... 31 Allocation of Foreign Exchange .... .................. 32 B. Effective Protection Rates as Measures of Intra-Sector Incentives ....................... 33 A Review of Estimates . ................ ... ...... . . 34 Effective Protection and Ex-Factory Price Control ... 37 C. Industrial Licensing and Resource Allocation .... ...... 40 IV. INCENTIVE POLICIES WITHIN AGRICULTURE .................. ... 46 A. Allocational Relevance of Price Signals in Sudanese Agriculture ............. . ................. . 46 B. Determinants of the Incentive Framework ............... 47 Foreign Trade Taxes, Subsidies and Quotas ........... 47 Producer Price Policy/Marketing Arrangements ........ 48 Local Taxation ............. ......................... 49 C. Effective Producer Prices and Intra-Sector Incentives 50 D. Public Irrigated Agricultural Schemes: Special Aspects ................ ............................ 55 Inter-Crop Allocation of Land .... ................... 57 Inter-Crop Allocation of Labor ...................... 57 Joint Account vs. Land/Water Charge ................ . 58 (ii) Table of Contents Page No. V. INTER-SECTORAL BIAS IN INCENTIVE POLICY ................ ... 60 A. Effective Protection (Taxation) of Agriculture ........ 60 Output Values . .*.................................. . 61 Input Values ....................................... 61 B. Effective Protection of Industry .... .................. 65 C. Protection for the Commerce Sector ....... .. .......... 68 VI. INCENTIVES FOR FOREIGN TRADE ..... ......................... 72 A. Norms for Trade Policy ................................ 72 B. Bias in the Trade/Payments Regime ........ .. ........... 73 Indices of Bias ................ .. ................... 73 Estimates of Bias .............. . .............. 74 Bias and Inflation ............... .. ................. 77 C. Effects of Non-Trade Interventions ........ .. .......... 79 Domestic Excise Taxation ........................... 79 Agricultural Producer Pricing ......... .. ............ 82 Recomputation of Bias for 1973 ......... .. ........... 84 D. Qualifications ..................................... 85 E. Revenue Considerations ...... .......................... 87 F. Is the Exchange Rate Overvalued? ......... .. ........... 89 VII. EXPERIENCE WITH DIRECT CONTROLS .. ....... ........ ... 91 A. Foreign Trade Licensing ............. .. ................ 91 B. Industrial Licensing .................... .. ............ 93 C. Domestic Price Control Policies ........ ...... . 94 VIII. AN AGENDA FOR POLICY REFORM ..... .......................... 97 A. Incentive Policies and Development Strategy . . 97 B. The Policy Package: An Outline . . 98 C. The Policy Package: A Discussion ................ . 100 Foreign Trade/Payments Policies . .. ............ 101 Tariffs, Excise Taxation and Protection . .101 Other Domestic Fiscal Policies . ..................... 104 Other Intra-Sector Policies .. 104 APPENDIX TABLES (iii) LIST OF TEXT TABLES Table No. Page No. 1 Most Frequently Applied Import Duty Rates ............ 9 2 Import Tax Rates ....................................... 11 3 Export Tax Rates ........ ............................... 18 4 Maximum Prescribed Profit Rates for Selected Commodities .22 5 Industrial Protection through Import Restrictions (1973) .25 6 Import Duty Concessions for Industry, 1971/72-1973-74 ..................................... 27 7 Estimates of Protection, 1971 .......................... 35 8 Nominal Rates of Protection for Selected Industrial Products, 1971 .39 9 Alternative Estimates of Effective Rates of Protection for Selected Industrial Products, 1971 ....................................... 41 10 Distribution of Fixed Assets in Industry, 1971 43 11 Effective Producer vs. International Prices of Major Sudanese Crops .52 12 Effective Protection of Five Agricultural Crops, 1972-73 ............................................... 62 13 Imported Agricultural Intermediate Inputs .... .......... 63 14 Value-added and Effective Protection Rates by Sub-sector, 1971 ... ....... . 67 15 Controlled and Actual Retail Prices for Selected Commodities (February 1975) .. ............... 70 16 Estimates of Bias in the Foreign Trade Regime . ......... 75 17 Price Movements since 1970 .................. ........... 78 18 Effect of Non-Trade Policies on Bias for 1973 .......... 81 19 Frequency of Export Bans ........ ....................... 86 I. INTRODUCTION* A. Definition and Scope 1. "Resource allocation" connotes many things to many men. Inclusion of the phrase in a title demands instant elaboration. In this paper we attempt to describe and evaluate the policy framework which guides the allo- cation of land, labor and capital between competing activities in Sudan. But even this statement is too general. It reveals nothing of: (a) objectives in terms of which allocation policy may be evaluated; (b) the demarcation between those "influences" which may be appropriately studied as policy instruments and those that must be taken as "institutional givens"; (c) the further delineation of those policies which most directly affect the incentive framework; (d) the distinction between static and dynamic allocation considerations; and (e) the diversity of economic organization and the varying relevance of incentives for resource allocation. A word on each of these will help define the scope of this paper. * This paper was prepared in connection with the International Labor Office's Comprehensive Employment Strategy Mission to Sudan in February/ March 1975. A condensed version appears as Technical Paper No. 17 in the Mission's Report, Growth, Employment and Equity: The Case of Sudan, published by ILO in 1976. While some of the factual material and pol- icy suggestions presented here have been overtaken by events and policy changes since 1975, the analysis retains interest as a case study. - 2 - 2. We shall take it as axiomatic tiat the r -nc.pi obje tives wTh must underlie any evaluation of resource allocation pvrliies are econiomic efficiency (growth in a dynamic context) -ad equity (mainly inter-personal and inter-regional). n the whole the evaluation of the p.licy frame in this paper will be in terms of efficie.acy criteria. To rephrase in ecoiearic jargon, we shall try to diagnos.! conspicuous, policy-indu,ed departures from the economy's potential production frontier. Tlhis is cerLai-ly not because we consider equity objectives to be secondary. Rather, it is our belief that the most powerful instruments for effecting equity goals in Sudan lie within the domain of public expenditure policy (especially in the rural sector), a domain, which, as we make clear below, is outside the scope of this paper. And that therefore it makes good sense to rest the evaluation of incentive policies essentially on efficiency criteria. However, we shall be careful to avoid Pavlovian criticisms of equity-informed departures from efficiency policy norms. Indeed, where we feel that specific incentive policies constitute efficient (least-cost) vehicles for equity goals, we shall say so. 3. Any discussion of public policy requires implicit or explicit distinctions between those government modalities and actions which form elements of policy and those which are more appropriately categorized as institutional substructure, givens in the analysis. ThEe more radical the analysis the smaller is the bedrock of institutional givens. Like all line- drawing exercises, mucli hinges on judgment. On this point we shall tend to be conservative, because we believe that the acceptability of our analysis and recommendations will be greater the less the accompanying dosage of institutional restructuring. To illustrate: in the present Gezira.scheme the Board decrees tne cropping pattern for every year. We shall take this fact as a given, thus precluding exploration of alternative institutional arrangements for determining cropping pattern (e.g. leaving the choice completely up to tenant farmers). However, we shall evaluate as policy the specific cropping pattern choices decreed by the Board and the analy- tical bases for these decisions. 4. Public policies with respect to resource allocation can be con- veniently partitioned into three types: (a) Direct public participation in productive activity, with the state as entrepreneur; (b) Public expenditure on infrastructure and services to support and induce complementary private productive activity; (c) Public "indirect" 1/ intervention through the foreign trade! exchange, fiscal, monetary and price regimes which together engender the incentive frame guiding resource allocation by private and quasi-private agents. Within this rough typology it is the last category which we refer to by the shorthand rubric of "incentive policies", and which is the concern of this paper. 5. The frequent characterization of Sudan as an economy in which the public sector looms large in production may suggest that the domain over which 1/ This is a broad use of the term "indirect" which encompasses interven- tions through the price mechanism (taxes, subsidies) as well as admin- istrative controls like auantitative trade restrictions. - 4 - the incentive structure prevailing in product and factor markets has an impor- tant influence is small. We take issue with this suggestion. We believe there is a real danger of painting an excessively command economy picture of Sudan. fhe conventional characterization rests heavily on grouping the production within the large agricultural parastatals with the public sector. While this is in some senses appropriate, it is important to realize that: (a) within the parastatals many of the decisions for allocating labor, land and minor on-farm investments are taken by private agents, the tenants; (b) even where the public managing board decrees the crop rotation pattern, the choice of crops to include in the rotation is, in the medium term, sensitive to their relative prices; (c) extrapolating recent trends, one can reasonably expect an increasing proportion of the marketed agricultural surplus to originate from rain-fed areas, and less from Gezira-type schemes, where the proportion of private allocative decision making is smaller. As for the industrial sector, the state-owned Industrial Production Corporation has returned to private hands some of the companies nationalized in 1970. At present over 60% of industrial value added is estimated to originate in the private sector. And current prospects suggest that this share will increase with time. In any case, the public sector units are subject to much the same industrial policy regime as private units with regard to market-information- based appraisals, licensing procedures, foreign exchange allocation, protec- tion and fiscal incentives; and within this policy framework the IPC units are expected to behave in an as-if-private manner. For all these reasons we think it would be difficult to overestimate the resource allocative role of the incentive structure embedded in the trade, fiscal, monetary and price regimes. 6. Clearly, the incentive framework informs both static and dynamic allocation decisions. Both fall within our purview, but the relative emphasis will change with sectors. For example, within the manufacturing sector, where present factor allocations are mostly a reflection of past investment decisions, it is more important to consider the implications of the incentive structure for future factor allocations. In contrast, in agriculture, land allocation between alternative activities is much more readily reversible, pointing up the importance of the incentive framework for current allocation decisions as well. B. Policy Components of the Incentive Framework 7. What we connote by the "incentive framework" will perhaps become clearer if we catalog the main policy components of this structure. They are: (1) Explicit taxes/subsidies on international transactions; (2) Exchange rate policy; (3) Import licensing/foreign exchange allocation; (4) Export licensing/export marketing systems; (5) Explicit non-trade taxes and subsidites; (6) Domestic price control policies; (7) Domestic project licensing policies; (8) Pricing/administrative allocation of publicly provided infrastructural services; (9) Domestic credit and interest rate policies; and (10) Wage policies. All of these policy interventions interact with existing product and factor markets to create the structure of incentives guiding resource allocation in the Sudanese economy. 8. This paper will be limited to the incentive effects of the first eight categories of policy intervention, all of which impinge most immediately on product markets. The last two work directly through factor markets (some elemaents of the interventions relating to the foreign trade/payments regime also have important direct effects on the price of capital services). C. Main Questions Addressed 9. The paper will be shaped by attempts to answer (however crudely) the following key questions with regard to resource allocation incentives: (a) Do existing policies encourage economically efficient choice of activities within the major productive sectors, agriculture, and industry? (b) Does the current policy framework harbor any overall incentive bias in favor of agriculture or industry? (c) Does the present structure of incentives imply any pronounced bias in favor of import substitution or exports? (d) Are the government's direct controls on prices and quantity allocations efficient instruments for attain- ing stated objectives? (e) What key policy reforms need to be undertaken to facilitate a development strategy based on promoting agricultural exports? 10. We need hardly stress that the scarcity of data, past research and time will permit only a superficial analysis of these questions, but they are of such importance that we consider even this to be better than pure agnosticism. 11. Section II gives a synoptic description of those policy components whose workings cut across sectors, particularly elements of the foreign trade/payments regime. Details of these and other policy intervention modes are more usefully tackled within the intra-sector analyses, which follow. Section III evaluates the incentive structure within the Agriculture sector; Section IV deals with Industry. Section V exa,nines whether there is any broad inter-sectoral bias, and Section VI considers the issue of exports vs. import-substitution bias. Section VII notes some of the lessons to be drawn from the Sudanese experience with administrative interventions. In Section VIII an attempt is made to outline the key policy reforms necessary to make the incentive structure consonant with a development strategy based on agri- cultural-exports. - 8 - II. Elements of the Policy Framework i2. We confine this section to a summary description of those components of the policy framework whose influence, at least in theory, pervades the entire economy. The economic effects of these policies, as well as more details on their operation, are considered in later sections. A. The Foreign Trade/Payments Regime 13. The main elements of the foreign trade/payments regime are: (a) The exchange tax/subsidy scheme (b) Import duties and surcharges (c) Foreign exchange budgeting/exchange control (d) Import licensing (e) Export duties and surcharges (f) Export licensing/export marketing (g) Policies for invisibles. The Exchange Tax/Subsidy Scheme 14. The official exchange parity of the Sudanese pound with respect to the U.S. dollar has remained unchanged over the decade 1965 to 1975 at ES1 = US$2.87. Biqt since March 1972 the Bank of Sudan has operated at a 15% exchange tax/subsidy scheme on all transactions except exports of cotton and gum arabic, which amounts to a de facto 15% devaluation to a rate of hSl = US$2.50 coupled with 15% export taxes on cotton and gum arabic 1/. Unlike other foreign trade taxes which are administered by the Customs Department, this scheme is controlled by the Bank of Sudan, which transfers 1/ It is important to note that all balance of payments figures reflect conversions at the official parity. the net receipts to the Ministry of Finance. In his June 1974 budget speech the Finance Minister mooted the possibility of "withdrawing all or part of this incentive, in the case of goods that have proved in high demand inter- nationally and that are able to compete...". But up until the end of the year systematic withdrawal of the export subsidy on commodities besides cotton and gum arabic had not been undertaken 1/. However, in December 1974 the export duty on meat and meat products was raised from 5% to 20%, which is equivalent to withholding the 15% subsidy. Import Duties 15. The Sudanese Customs Tariff contains specific duty rates for nearly 1100 items, mostly on an ad valorem basis. There are 26 different rates of duty ranging from 5% to 600%. However, eight rates of duty together account for about 90% of the items (Table 1). Table 1: MOST FREQUENTLY APPLIED IMPORT DUTY RATES Rates Percent of Items to which Applicable (%) 40 43 10 9 100 9 25 6 70 6 50 6 20 5 150 -5 Cumulative Total 89 Source: A.R.A/Wahab et.al., "Budgetary Constraints and Prospects", paper prepared for Preparatory Conference for ILO CESM, January 1975. 1/ Apparently the export subsidy element has always been withheld in part or whole by the Ministry of Finance and National Economy on exports by public sector industrial units of the IPC. - 10 - As with most tariff structures, the highest rates of duty are on consumer goods (except cereals), while capital and intermediate products are taxed at lower rates (see Table 2). In addition to these duty rates there have been, from time to time, uniform import surcharges. 16. The collections from these import taxes have averaged 40% of c.i.f. import value between 1970/71 and 1973/74, though there was a steady decline from the 1970/71 figure of 46% to 34% in 1973/74. The decline is explained partly by the reduction in the 1972 import surcharge, partly by the increasing importance of import duty rebates under fiscal concessions, and partly by recent changes in import composition in favor of low-duty foodstuffs. 17. Furthermore, one should note that Sudan also levies consumption duties on five items (beer, cigarettes, motor spirits, lubricant oil and matches), which, because they impinge solely on imports of these commodities, can be analyzed as commodity-specific import surcharges. The high rates levied on these items lead to duty collections amounting to 5 or 6% of total c.i.f. import value. 18. Finally, since June 1974, a 2% Development Tax has been instituted, which is collected on imports, exports and domestic production. The import- related element acts as an additional, uniform import surcharge 1/. Foreign Exchange Budgeting/Exchange Control 19. Foreign exchange is allocated according to an indicative budget prepared every year by the Foreign Exchange Budget Committee. The Committee is chaired by the Foreign Trade wing of the Ministry of Finance and National Economy (henceforth MinFin), and includes members from the Budget section, 1/ Medicinal products and government purchases are exempt. Table 2: Import Tax Rates 1/ (Z) 1970 1971 1972 1973 1974 (Jan-Sept) 1. Selected Foodstuffs 41.4 36.7 35.6 28.8 39.9 (a) Wheat 14.4 18.1 25.1 6.3 6.5 (b) Sugar 35.8 36.2 36.2 34.6 53.5 (c) Tea 49.6 44.4 32.3 50.6 29.1 (d) Coffee 101.7 75.4 71.8 36.2 29.1 (e) Dairy products 36.5 33.6 34.8 22.0 31.5 2. Cigarettes 605.2 634.2 774.3 639.8 670.6 3. Medical & Pharmaceutical Products 19.3 17.4 15.7 9.5 8.6 4. Fertilizers, "Manufactured" 23.6 23.3 21.0 12.5 11.8 5. Petroleum Prod. (incl. crude) 84.3 86.9 91.0 94.2 160.7 6. Insecticides 16.9 16.5 9.3 6.1 7.8 7. Rubber Manufactures 48.4 33.2 64.3 30.9 35.4 8. Wood and Cork Manufactures 43.1 50.6 44.8 41.4 23.2 9. Iron and Steel 40.3 41.3 35.5 30.9 31.3 10. Metals Manufactures 27.4 29.0 39.1 34.1 29.3 11. Jutes and Sacks 25.5 28.0 25.3 18.7 19.1 12. Machinery, Electric 59.9 57.3 35.8 51.3 44.0 13. Machinery, Non-Electric 21.2 33.0 25.7 23.0 20.4 (a) Agricultural machinery 20.2 24.3 20.1 12.0 12.1 (b) Other non-electric mach. 20.0 34.7 24.6 24.2 20.7 (c) Machinery spare parts 25.7 31.0 39.2 22.5 22.2 14. Road Passenger Cars 67.0 113.2 75.7 80.3 122.2 15. Lorries 66.2 61.9 81.8 46.0 34.2 16. Tires & Tubes 66.0 104.9 60.0 43.6 38.3 17. Auto-Spare Parts 39.1 45.5 35.6 30.6 28.7 18. Textiles 61.6 45.5 40.2 37.5 41.3 19. All other imports 51.3 53.1 32.4 30.5 24.4 Total 51.8 52.3 48.7 39.0 42.4 1/ These are import tax realizations as percent of c.i.f. import value. All duties and surcharges are included, except for the 15% tax element of the Exchange Tax/Subsidy Scheme which has operated since March 1972. Source: Appendix Table 1. - 12 - Cits oms Department, Bank of Sudan, Planning Commiss-ioii ;lid Ministry of Industry. The Committee advises the Finance Minister who has final authority on foreign exchange allocations and import licensing. 20. Between March and June the foreign exchange budget is prepared for each fiscal year. Export proceeds, invisible and capital inflows are estimated. Debt service and other estimated invisible items are netted out, leaving the rest for allocation to commodity imports. Government import requirements are first estimated, the major items being imports against the Development Budget (including the major public entities like Sudan Railways, Central Electricity and Water Authority (CEWA) and the agricultural parastatals), imports of wheat and sugar which enter solely on government account, and intermediate import requirements of the public entities. Private sector (including the Industrial Production Corporation (IPC)) commodity import estimates are subdivided between petroleum, oil and lubricant products and "Other". Within this large, residual category of "Other" is included an estimated allocation for intermediate and capital good imports for domestic manufacturing industry; while the Committee jointly agrees on this sum, its detailed allocation across production units is largely in the hands of the Ministry of Industry. All commodity imports have to be licensed at some stage by M4inFin's Foreign Trade wing, but it is only with regard to private imports (other than for domestic manufacturing) that this department wields substantive allocative authority (see below). 21. Once the Foreign Exchange P,,lu,ii, is approved, the Committee continues to meet every month to adjust the broad allocations in the light of short-term unanticipated changes in circumstances. The licensing authorities use the budget as their main guide. Befnre any expenditures can occur, all licenses have to be franked by the exchange control authorities in the Bank of Sudan, - 13 - who also administer the non-commodity elements of the exchange control system. The Bank of Sudan thus serves as a second administrative monitor on foreign exchange allocation for imports; it can question the consonance of individual issued licenses with the jointly agreed foreign exchange budget, though it cannot unilaterally ceject them. Import Licensing 22. In addition to the Bank of Sudan and the Import Licensing Section in the Foreign Trade wing of MinFin, several other public agencies are intimately associated with the licensing process, depending on the commodity and final importer involved. 23. Effective approval of import requests by government and public entities is chiefly exercised by the Purchasing Section of MinFin. Two impor- tant commodity exceptions are wheat and sugar, both of which are imported solely on government account. The staff work on wheat import requirements is conducted by the supply wing of MinFin, with the Minister being involved in the final approval. On sugar, the recently created Sugar Corporation is the main approving authority. In addition, minot import requests by the Sudan Gezira Board, Sudan Railways and C.E.W.A. up to specified value limits do not have to be channeled through the Purchasing Section, but can be directly processed by the Import Licensing Section in the Foreign Trade wing. For all other government imports, the Purchasing Section is the effective rationing aiti7hority, with the Import Licensing Section in the Foreign Trade wing pro- viding subsequent pro forma approval. 24. The Import Licensing Section plays a similarly pro forma role with respect to import requests for domestic manufacturing industry. Within the foreign exchange budget allocation for domestic manufacturing industry, the - 14 - detailed inter-unit allocation is done by the Ministry of Industry. The Ministry approves annual foreign exchange allocations for each plant for machinery, spare parts and raw materials. On that basis the Import Licensing Section issues Open General Licenses (OGLs) with one year validity, to the manufacturing firms for specified amounts by broad commodity categories. 25. For all other private sector imports the Import Licensing Section performs the substantive allocative function. Consonant with the overall magnitudes in the foreign exchange budget, this unit prepares annual private sector import budgets with fairly detailed commodity breakdowns. 1/ For each commodity category, the budgets are based on estimates of domestic demand (relying on past trends and special needs), expected domestic supply and anticipated foreign prices. These budgets provide the detailed norms which inform private import licensing. Commodities fall into three broad categories with regard to licensing procedure. (a) Open General License (OGL): Commodities such as spare parts, medical and pharmaceutical products and jute sacks are licensed under OGL, the distinguishing fea- tures being that these goods can be imported by all importers and that the limits arising from the annual budgets are loosely applied for them. 2/ (b) Annual Quota System: This extends to a range of important items (such as -agricultural machinery, tyres and tubes, textiles, glassware, batteries, 1/ These disaggregated budgets include commodity requirements for domestic manufacturing as estimated by the Ministry of Industry. 2/ As noted earlier, once approved by the Ministry of Industry, imports for domestic manufacturing also enter under OGL. - 15 - light fittings, stationery, canned food, and other "basic" consumer items) for which the authorities believe previous import experience and a certain degree of specialization is important. Consequently the bulk of the annual budget for these commodities is allocated to established importers, the distribu- tion being governed by the past shares of individual traders in the import of the specified commodity as well as some evaluation of the "quality" of the importer (Class I, Class II, etc.). The rest of the annual quota for each commodity is allocated to "new" importers to "encourage competition." 1/ (c) Other Commodities: A residual category of commodities (usually accounting for less than a quarter of all private imports) are licensed periodically over the year, depending on applications, evaluation of need and availability of foreign exchange. Tea and coffee, though imported under private monopoly con- cessions, fall into this category. So do most com- mercial vehicles, though for them there is a special twist: because they are usually imported under 3 to 5 year supplier-credit arrangements their impact on foreign exchange availability is attenuated over time; / Though the quota is estimated for the year, the licenses issued for this and the next category have 3-month validity, with possibilities for renewal. - 16 - so the authorities are relatively free in permitting these imports (and the licenses are not issued on a cash basis). 26. In general, the last two categories of private imports tend to bear the brunt of unanticipated shortfalls in foreign exchange availability, while government and OGL imports are more protected. 27. Since 1972 a new category of imports has risen in prominence: Nil Value Licensed Imports. The system was initiated in April 1972. As the name suggests, imports under these licenses place "nil" draft on domestic foreign exchange availability; they are supposed to be financed by foreign exchange holdings of Sudanese residents abroad. The original purpose of the system was to encourage repatriation, in the form of commodity imports, of foreign exchange resources held abroad by residents. Recent evaluations have pointed to abuses which have cast doubt on the future of this system; it has been temporarily suspended to await an in-depth review. During its operation, specified categories of goods could be imported after licenses had been issued by the Import Licensing Section and franked by the Bank of Sudan. Initially the commodity specification was liberal, leading, predictably, to heavy imports of consumer luxuries like automobiles and textiles. Subse- quently the specification was tightened in the direction of "more essential" products like spare parts (see Section V for an evaluation). Export Duties and Surcharges 28. Export duties have been levied at rates up to 15 percent on most traditional Sudanese exports. The duties on cotton are specific; in recent years they have amounted to 8-9 percent of export value. In addition to duties there are specific export royalties on one commodity: gum arabic. - 17 - In June 1974 minimum duties on exports were raised to 5%, and previously untaxed commodities were brought into the net. At the same time the Develop- ment Tax of 2% became applicable on all exports. Up until June 1974, the total of export taxes as a share of exports had varied between 6 to 8 percent. The new measures are likely to raise the average realized export tax rates by a couple of percentage points. Table 3 contains realized export tax rates by major commodity categories for the past five years. Export Licensing/Export Marketing 29. Since September 1973 all exports other than cotton and gum arabic have been subject to formal licensing by MinFin's Foreign Trade wing, unless the goods are shipped to Saudi Arabic. And exports of cotton and gum arabic (as well as sesame and groundnuts) have been in the hands of public sector companies since the nationalizations of 1970. The main export goods whose marketing remains in private hands are dura, meat, hides and skins, vegetable oils, oilcakes and expellers. Licenses for these products are only obtained if the proposed transactions meet the minimum export price requirements set by the Export Price Committee, which is coordinated by the Foreign Trade wing of MinFin and includes members from the Bank of Sudan, Ministry of Agriculture and private traders. Periodically, MinFin bans exports of these commodities to alleviate domestic scarcities expressed through high prices or physical shortages at controlled prices. 30. Public sector export marketing was substantially reorganized in the four years after the 1970 nationalizations. The Cotton Marketing Corporation, fully state-owned, was created in 1971. Gum arabic and oilseeds initially continued to be exported through 100% nationalized companies, operating under the aegis of the State Trading Corporation. In 1974 the private sector was - 18 - Table 3: Export Tax Rates 1/ (%) 1970 1971 1972 1973 1974 (Jan-Sept) 1. Cotton 7.8 9.2 8.9 7.8 8.6 (a) Sakel 7.8 9.3 9.4 8.1 9.4 (b) American rain-grown 3.7 3.1 2.9 3.3 4.4 (c) American irrigated 8.3 9.0 7.0 6.6 6.2 (d) Scarter 6.4 5.0 4.5 4.8 10.0 (e) Waste 150.0 3.7 100.0 - - 2. Cottonseed 3.0. 3.8 4.0 2.3 7.4 3. Sesame 3.3 4.3 4.0 4.0 5.8 4. Groundnuts 1.9 2.2 2.1 2.1 5.9 5. Gum Arabic 20.9 20.5 20.0 18.0 8.8 6. Oilcake and meal 3.7 5.0 4.6 3.5 5.0 7. Dura (Sorghum) - 0.4 2.0 2.6 2.9 8. Meat n.a. 17.9 0.1 0.9 4.9 9. All Other 0.7 1.4 1.4 1.3 4.9 Total 7.4 8.0 7.6 6.2 7.0 1/ These are export tax realizations as percent of f.o.b. export values. All duties, royalties and surcharges are included (but not the subsidy associated with the Exchange Tax/Subsidy). Source: Appendix Table 2. - 19 - permitted an equity share in newly created concession companies: Gum Arabic Corporation and the Sudanese Oilseeds Corporation. The state/private equity sharing of these export monopolies has yet to be finalized. Policies for Invisibles 31. Exchange control applies to all invisible payments. Certain remittances for education abroad and travel are permitted. On the side of proceeds the most noteworthy feature is the 60 percent per annum incentive bonus paid on remittances to Sudan by nationals resident abroad (other than government officials and students), as long as these are kept in a special account for at least six months (until January 1974 the incentive rate was only 30 percent per annum). The incentive bonus is over and above the 15 percent exchange subsidy referred to earlier. Though defined in "per annum" terms, the bonus is payable only once irrespective of the duration (beyond six months) of the deposit. B. Domestic Price Control Policies 32. With respect to domestic markets, at least three different and important exercises of government commodity price setting should be dis- tinguished 1/: (a) The Ministry of Industry is charged with setting ex-factory prices on all domestically manufactured products. 2/ 1/ The pricing of publicly produced goods and services is excluded except to the extent IPC units fall within the first category. 2/ Except for sugar and wheat flour where prices are determined by the Sugar Corporation and the Supply wing of MinFin, respectively. - 20 - (b) MinFin sets minimum wholesale market prices for key export crops such as groundnuts, sesame and gum arabic, and also determines into-mill prices for major import- substituting agricultural products like wheat and sugarcane. Into-mill prices of cottonseed are also set by MinFin. (c) Efforts by MinFin to control wholesale and retail prices of a wide range of imported and domestically produced products. 33. Ex-factory pricing of manufactures and producer-pricing of agri- cultural commodities are reviewed in Sections III and IV: only the third category is briefly described here. Within this category we need to subdivide between: (a) specific retail price controls on selected com- modities; and (b) much more general regulation of wholesale and retail prices through the legislation of maxi- mum profit margins (on sales) for different stages of distribution. Specific Retail Price Controls 34. Specific retail price ceilings are officially set (under the authority of the 1966 Price Control Ordinance) for some 20 "essential" consumer items including meat, fish, sugar, tea, coffee, bread, flour, certain fruits, vegetables and cottonseed oil. The central unit charged with monitoring price control is in the Supply wing of MinFin. For locally produced agricultural commodities authority to levy and monitor retail price - 21 - control is delegated to Provincial Commissioners. The effectiveness of price control is considered in more detail later, but it is clear that except for items like sugar, where government supply backs up legislated prices, price control has been generally ineffective. And the creation of a new price investigation bureau in the Supply wing in 1974 has not significantly changed matters. General Regulations on Trade Profits 35. MinFin's Supply wing is also charged with checking and enforcing adherence of domestic traders to those sections of the 1966 Price Control Ordinance which decree maximum rates of profits (on sales) at each stage of the distribution chain: importer (for imported commodities), wholesaler, and retailer. These regulations apply to all commodities marketed domes- tically. The maximum rates vary across commodity categories, which are specified in considerable detail (over 50 items in the Price Control Order). Moreover, special maxima are laid down in those cases where the different stages of distribution are collapsed into one economic agent. Table 4 illustrates these remarks with a few examples. 36. The adherence of traders to these regulations is supposed to be enforced through (a) complaints from agents in the distribution chain about overcharging by preceding stages; and (b) spot-checks of prices and sales invoices by officials from MinFin's Supply wing. As with the retail price maxima, the adherence to these rules is limited in all situations where mar- kets permit prices higher than those implicit in these regulations (see Section V below). - 22 - Table 4: MAXIMUM PRESCRIBED PROFIT RATES FOR SELECTED COMMODITIES Commodity Distribution Stage 1/ Max. Profit Rate t%) Iron or sheet tubes I-W 10 W-R 5 R-P 10 I-P 20 Cement I-R 10 R-P 10 I-P 15 Electrical Apparatus I-R 15 (including refrigerators, R-P 10 electric fitting, irons, etc.) I-P 20 Cotton Grey Piece Goods I-W 5 (e.g. damoria) W-R 5 R-P 7 1/2 J-P 15 Dyed Cotton Goods I-W 10 W-R 5 R-P 15 I-P 25 Domestic Vegetables W-R 5 R-F 10 Cigarettes, tobacco, cigars I-W 10 W-R 2 R-P 10 1/ I = Importer; W = Wholesaler; R = Retailer; P = Public Source: 1966 Price Control Ordinance Supplement to Sudan Gazette, No. 1021. - 23 - III. Incentive Policies within Industry 1/ A. Major Determinants of the Incentive Framework 37. The main policy determinants of the incentive framework for industry are: (a) Foreign trade taxes, quotas and import bans; (b) Fiscal concessions; (c) Infrastructural incentives; (d) Industrial licensing; (e) Ex-factory pricing; (f) Domestic excise taxation; and (g) Allocation of foreign exchange. Much of what falls under the first five items is unified in the 1974 Develop- ment of Encouragement of Industrial Investment Act, the latest revision in a series which started in 1967. This Act (and its 1967 and 1972 predecessors) constitutes the basic legislation for industrial policy in Sudan and centers broad powers for industrial licensing, grant of protection and fiscal con- cessions, ex-factory pricing, etc. on the Minister of Industry. One impor- tant general point: ever since the 1972 Act, no explicit discrimination is permitted between foreign, local, public and private enterprises in the granting of licenses, concessions and facilities. Though we shall refer to it frequently (as the 1974 Act), we find it analytically convenient to organize our discussion according to the above classification. 1/ As befits the title, this section is limited to key policy elements composing the incentive framework. Numerous other industrial policy considerations (such as those relating to manpower development, labor- management issues, administrative organization of the IPC, industrial free zones, terms of foreign collaboration) are omitted. - 24 - Foreign trade taxes, quotas and import bans 38. In Section II we provided a general description of the foreign trade/payments regime. For those commodities that can be manufactured domes- tically the import QRs are the most potent and frequently deployed protective device. Import tariffs play a secondary role in protecting domestic industry. Table 5 lists manufactured products which enjoyed protection from import bans or quotas at the end of 1973. The bans should be interpreted loosely, since imports of such items are periodically permitted at the discretion of MinFin and the Ministry of Industry if domestic scarcities become really acute. We stress the role of QRs because they tend not be noticed: measures of effec- tive protection are often computed and analyzed only on the basis of import tariffs, because information on other measures is not available. From the fact that bans and quotas have to be deployed, it is usually legitimate to conclude that the implicit tariffs associated with these QRs are significantly higher than the explicit nominal tariffs. Fiscal Concessions 39. The fiscal concessions under the 1974 Act are schematized below: Business Profits Tax (B.P.T.) (a) 5 year exemption from commencement of production; (b) for subsequent 5 years only profits in excess of "10% of the capital of the establishment" are sub- ject to tax; (c) another 5 year exemption related, pro rata, to the increase in capital by the establishment in the first 10 years; and if profits after such pro rata exemption fall below 10% of capital, then complete exemption; - 25 - Table 5 : Industrial Protection through Import Restrictions (1973) A. Products under Import Ban 1. Perfumeries (not of 13. Air coolers/ 25. Zinc sheets high quality) Air conditioners 26. Ball-pens (ordinary) 2. Sweets 14. Knitwear (underwear) 27. Shoes: plastic, 3. Biscuits 15. Ready-made skirts canvas, leather, 4. Soap 16. Plastic sacks slippers 5. Laundry blue 17. Vegetable oils 28. Cement 6. Household utensils (from 18. Stationaries (ink, chalk) 29. Beer aluminum except colored, 19. Refrigerators 30. Sherry heavy and from enamel ware) 20. Tanner leather: cow, 31. Alcohols (for industry) i. Steel furniture sheep, goats 32. Men's socks 8. Batteries (for cars) 21. Packing & Packaging 33. Tomato paste (canned) 9. Textiles (Dabalan, Damoria materials 34. Matches & Wil]aya) 22. Zippers (for clothes 35. Elastic and Cord 1O. Towels & suitcases) 36. Macaroni and Vermicelli ,1. Lanterns (from yarn) 23. Paints 12. Chairs (from bamboo) 24. Plastic products (different) B. Products Protected by Quota 1. Particle-board 4. Glass products 2. Sugar 5. Juices (from fruits) 3. Cigarettes 6. Canned fruits and vegetables Source: Ministry of Industry and Mining. - 26 (d) carryover of all losses from the exemption periods to the last year, thus permitting full offset against the first year of post-exemption profits; Import Taxes "exemption from payment of customs duties, surcharges and any other duties" relating to machinery, equipment and spare parts, and raw materials; but the exemption does not extend to the Exchange Tax/Subsidy scheme administered by the Bank of Sudan; Excise Taxes (a) exemption from excise duties on locally produced raw materials used in production; (b) "reimbursement of excise duties and any other taxes or duties of whatever sort, whether direct or indirect, which the establishment had paid for production to be exported". (All quotations are from the text of the 1974 Act.) 40 Similar fiscal concessions were granted under the earlier Acts of 1967 and 1972. As in the past, the Minister of Industry, acting on the advice of the Advisory Committee for Industrial Development, has the authority to grant these fiscal concessions wholly or partially. If the past is any guide, the BPT exemptions are wholly granted. For import taxes, the estimates of exemptions for the last three fiscal years (Table 6) indicate that fully 90 percent of assessed import duties was exempted for domestic manufacturing industry on both machinery and spare parts and raw materials. Table 6 Import Duty Concessions for Industry, 1971/72-1973/74 (in million bSd) 1971/72 1972/73 1973/74 Machinery Machinery Machinery and Raw and Raw and Raw Spare Parts Materials Total Spare Parts Materials Total Spare Parts Materials Total 1. Value of Exempt Imports 5.1 7.7 12.8 4.8 13.2 18.0 7.6 16.2 23.8 2. Import Duty Payable 2.0 3.7 5.7 1.8 5.1 6.9 2.3 6.7 9.0 3. Duty Paid at 'Granted' Rates 0.2 0.5 0.7 0.2 0.5 0.7 0.4 1.0 1.4 4. Amount of Exemption 1.8 3.3 5.1 1.6 4.6 6.2 1.9 5.7 7.6 5. Exemption as % of Duty Payable 90 90 90 89 90 90 83 85 84 Source: (1) Ministry of Industry and Mining, Statistics Department, for 1971/72 (2) Customs Department, Ministry of Finance and National Economy, for 1972/73 and 1973/74 - 28 - Infrastructural Incentives 41. Four categories of infrastructural incentives can be granted under the Industrial Development Acts: (a) industrial land at concessionary prices; (b) reduced electricity rates for enterprises; (c) reduced freight rates on haulage of inputs and outputs; and (d) reduced local rates. In fact the last three have been little used. Thp price reduction on the stock of land held by firms under concessions in 1969/70 was estimated at E4.3 million. Annuitized at the rate of 10% these concessions were valued at only LO.4 million per year, compared to profits tax exemption of W0.6 million and import duty exemptions of L5.0 million 1/ for that year. 42. Quite apart from the Industrial Development Acts, the pricing of power in Sudan involves cross-subsidization of commercial and industrial establishments by other consumers. 43. Against these price reductions in theory and practice for infra- structural services to industry, we must juxtapose the oft-repeated view that when it comes to physical allocations of scarce transport and power availabilities, industry is not a high-priority claimant. Given the severity of the transport bottleneck, this claim, if true, could easily outweigh the value of the infrastructural subsidies outlined above. Industrial Licensing 44. We have, so far, dwelt on those government actions which increase the private profitability of domestic industrial activities. We turn now 1/ Estimates by Ministry of Industry and Mining. - 29 - to policy interventions which inhibit the exploitation of such profit oppor- tunities. First, among these, is the industrial licensing apparatus, which, in principle, must sanction the establishment and expansion of all industrial enterprise in Sudan. In fact, quite a few small units are believed to escape this apparatus, but their quantitative significance is unlikely to be large, especially since such units are automatically denied official access to foreign exchange and to the various concessions available under the Industrial Development Acts. 45. All applications for new plants or expansions are studied by the Advisory Committee for Industrial Development, which is chaired by the Under-Secretary, Ministry of Industry, and advises the Minister. 1/ Any of six rather broad criteria (specified in the 1974 Act) may be used to justify approval: (a) defense or strategic importance; (b) uses local raw materials; (c) earns export revenue or substitutes for imports; (d) generates employment; (e) furthers economic cooperation or integration with Arab and African States; and (f) increases national income. It is virtually impossible to think up an industrial activity proposal which will not satisfy at least one of these crlteria! Hence their value as guides for rational selection is dubious. They certainly do not approximate, singly or together, social profitability analysis. And no systematic, social profit- ability appraisal is apparently done by the licensing authorities in the 1/ The Committee includes representatives from MinFin, the Director General of the Planning Commission, the Bank of Sudan Governor, the Manager of CEWA, and representatives of the Sudan Manufacturers' Association. - 30 - Ministry. The effective approval of applications is thus a function of the drive and initiative of the applicant, some market-information-based cash-flow projections, a broad assessment (usually) of import-substitution scope, and various discretionary elements in the licensing bureaucracy. It is clear therefore, that the checks provided by the licensing mechanism on the exploitation of profits signaled by the incentive framework (including anticipatory QR protection) are ad hoc, not systematic. Ex-Factory Pricing 46. With approval comes the grant of protection, concessions and access to foreign exchange for imports of machinery, raw materials, etc. When produc- tion is initiated, each unit is obliged to obtain approval from the Ministry of Industry for its ex-factory prices. All IPC units have certainly been subject to this proviso. Its potency with respect to private units is more questionable. The Ministry approves prices on a cost-plus basis, using infor- mation supplied by the producer for its year of operation. 1/ Among the more obvious limitations of this procedure are: (a) lack of independent costing checks by the Ministry; it relies wholly on information provided by the firms; (b) in the first year production is usually well below capacity, leading to high overhead unit costs, which then become permanently ossified in the price structure for the products; 1/ During that year the unit operates under a "provisional price certificate" which usually allows it to charge prices of comparable producers. - 31 - (c) while the Ministry approves subsequent price revisions to take care of changes in costs,_ these are always upward, since no firm has an interest, in a protected market, in owning up to cost reductions; (d) the unit profit margins permitted in the cost- plus pricing formula are associated with very different returns to equity, or fixed assets, for different firms and sectors, depending on the volume of turnover; (e) too often prices are fixed on the basis of those permitted to other firms without adequate allowance for inter-firm differences in machinery, its age, packaging, raw material source and product quality differences. 47. In sum, though the Ministry approves ex-factory prices, much of the initiative on the levels at which these are fixed remains with the firms. And in protected markets the firms have a clear incentive to bias their efforts upwards. Nevertheless, as we shall see in the next subsection, ex-factory price control does sometimes check the extent to which firms can appropriate the profits implicit in the protected markets. Domestic Excise Taxation 48. For those industrial commodities on which they are applied,excise taxes mop away some-of the rent element between the controlled ex-factory price and the protected market clearing price. If ex-factory pricing were - 32 - firmly and independently administered by the Ministry, the level of excise taxation would be of little consequence to the firms. But because the firms have considerable leeway in reaping the profits in the protected markets, excise taxes are a real disincentive. In this respect the 1974 Act records an advance over the previous status quo. Now new excise taxes and increases of existing ones can be levied only with the approval of the Minister of Industry. There is no longer any scope for uncoordinated grant of protection by one ministry which is unilaterally reduced by another. Allocation of Foreign Exchange 49. We described in Section II how the Foreign Exchange Budget for each fiscal year makes a "global" allocation for the domestic manufacturing sector. The Ministry of Industry is responsible for inter-unit allocation. In practice this follows a 2-stage procedure. First, foreign exchange is made available for capital good imports for newly licensed units and capacity expansion of existing establishments. What remains of the "global" allocation is then parcelled out to each firm for use towards imports of spares, fuel and raw materials. This second-stage allocation is based on the past year's use of foreign exchange by different units. 50. We point to-two obvious objections to this system of allocation. First, the preemptive draft on the available foreign exchange by expansions of capacity gives it a de facto priority over foreign exchange for current uses, a priority which is difficult to justify in an industrial sector plagued by excess capacity, quite often because of foreign exchange scarcity. Second, with regard to the second-stage inter-firm allocation of foreign exchange for current imports, there seems to be little recourse to economic criteria. The application of past-use norms means that loss-making enterprises can continue - 33 - to receive foreign exchange while profitable ventures are constrained from expanding production. B. Effective Protection Rates as Measures of Intra-Sector Incentives 51. What is the cumulative effect of these policies on the allocation of resources within the industrial sector? That is the question to which the rest of this Section is addressed. A commonly used technique for aggregating the incentive effects of various industri-al policies is to compute the effective rates of protection conferred on different lines of industrial activity by the totality of incentive policies in operation. For any activity the effective rate of protection (ERP) is defined as: = (Value Added at Domestic Prices) - (Value Added at International Prices) (Value Added at International Prices) VAD - VAI VAI In effect, ERPs measure the degree of protection conferred on domestic factors of production by policy-induced differences between domestic and international (border) prices for traded goods. Information on value added at domestic prices is usually available. The guts of the calculation rest on identifying the departures, by commodity, of domestic from international prices, and using this information to deflate the domestic gross output and input values to arrive at an estimate of value-added at international prices. 52. If import tariffs were the only policies creating differences between domestic and border prices, then deflations could all be done using informa- tion from the Customs Tariff schedule. 1/ In Sudan we have pointed to several 1/ There would be the added assumption of "no water in the tariff", that is, that domestic producers were taking full advantage of the protection offered by the tariff structure. - 34 - other dimensions of policy which influence the wedge between domestic and international prices of traded goods. With this observation in mind we begin with a review of two recent efforts at estimating ERPs for Sudanese industry. A Review of Estimates 53. Both sets of estimates draw on the 1971 IDCAS survey of industry, which collected data on domestic value-added, gross output at factor cost, input values and other variables for SITC categories down to the 4-digit level. The set of estimates by Dr. Naseem 1/ is based exclusively on informa- tion from the import tariff schedule with respect to the final products; for traded inputs, since there are no detailed data on the structure of inputs, he assumes uniform tariffs, of 15 percent for raw materials, 35 percent for packing materials and 0 percent for non-traded inputs. The sectoral defini- tions for which his ERP estimates are prepared are disaggregated only to the 3-digit SITC level. Table 7 records his estimates of ERPs. These estimates have some obvious limitations: (a) Though data on the more disaggregated 4-digit classification were available, Naseem chose to compute estimates at the more aggregated 3- digit level. The nominal protection rates used for each sector are simple averages of tariffs on commodities in that sector, and not weighted by value-added or trade share. This means that 1/ "Manufacturing Industry: Development Strategies", paper presented at the ILO-CESM Preparatory Conference, February, 1975. - 35 - Table 7: ESTIMATES OF PROTECTION, 1971 SITC CODE Commodity Nominal Protection, % Effective Protection, % A B A B 3112 Milk Products 35.0 84.6 49.0 229.0 3113 Fruits & Vegetable Canning 60.0 84.6 * 229.0 3115 Oil M4ills 23.3 84.6 * 229.0 3116 Flour Mills 28.0 84.6 * 229.0 3118 Sugar 0.0 84.6 0.0 229.0 3133 Beer 25.0 125.0 32.0 * 3140 Tobacco Products 354.0 353.9 * * 3211 Spinning, Weaving & Finishing ) 355.0 of Cotton Textiles 55.0 62.9 ) 265.0 40.0 ) 204.0 3213 Knitwear 70.0 62.9 * 40.0 3220 Ready Made Clothes 90.0 150.0 783.0 * 3231 Leather Tanning & Finishing 34.5 38.7 ) 167.0 * ) 112.0 3233 Leather Products (except shoes) 43.0 38.7 67.0 74.0 3240 Shoe Industry 62.7 75.0 236.0 552.0 3412 Containers & Packing Material 37.0 39.9 77.0 86.0 3523 Soap Detergents & Perfumes 85.0 87.0 * * 3560 Plastic Products 36.4 36.4 322.0 312.0 3620 Glass Products 36.0 35.9 100.0 96.0 3829 Refrigerators & Air Conditioners 40.0 39.9 358.0 253.0 3839 Car Batteries 25.0 25.0 38.0 71.0 3843 Truck Assembly Line 63.0 63.1 * 272.0 Note: * indicates negative value at international prices. Source: A = Naseem (op. cit.) B = IBRD Industrial Sector Survey, 1974. - 36 - the nominal (and hence effective) protection rates estimated for a 3-digit group as a whole may be quite different from those actually applying to important commodities within that group. An example is the production of edible oils which, though it dominates the food pro- cessing sector, may enjoy a much lower ERP than that estimated by Naseem for the food processing sector as a whole. (b) The estimates rely exclusively on tariff informa- tion; they ignore the effects of other trade policies such as QRs, as well as the various domestic incentive policies discussed above. (c) Even for tariffs, the blanket assumptions regard- ing tariff rates for inputs are questionable, particularly for some important domestic-raw- material-using sectors like textiles, sugar and edible oils. 54. The ERP estimates computed by the IBRD Survey of the Industrial Sector meet some of these objections. To begin with, the commodity classi- fication is finer, down to the 4-digit level at which the basic data were available. Secondly, these estimates are not limited to information on the tariff structure: they take account of the effects of domestic excise taxation, and, in a couple of cases, notably textiles, the nominal protec- tion rate on the output has been modified by information on domestic vs. - 37 - international prices. The nominal rates of protection for inputs are similar to those estimated by Naseem; however, adjustments have been made for some important industries for which the domestic prices of traded inputs appeared to be significantly above or below the 15 percent mark-up on international prices that was generally assumed. Notable examples of such exceptions are textiles, edible oils, leather tanning, leather shoes, fruit and vegetable canning. Table 7 compares the IBRD estimates with Naseem's. 1/ 55. Nonetheless these IBRD estimates can be faulted for two important omissions. First, no attempt has been made to include the protective effect of QRs on imports, which, as we noted, is so central to the industrial pro- tective system. Second, on the other side, the protection-reducing influence of ex-factory price control has been largely neglected. Both omissions can be explained by the absence (or disregard) of actual domestic vs. inter- national price comparisons. We consider the implications of these factors below. Effective Protection and Ex-Factory Price Control 56. We were able to obtain ex-factory control prices for a group of commodities for 1971. From this we selected a smaller group of products (a) which were relatively homogeneous (as product categories) and (b) for which information on comparable imports was available from the recorded trade statistics. For each such product we computed the corresponding c.i.f. import price, added on 15% as an internal trade-transport margin, and took 1/ In several cases sectors recorded negative value added at international prices. If the data are correct this indicates either waste of real re- sources in these industries or the possibility of factor and raw material substitution when one moves from protected to free trade regimes. Both explanations probably have some validity in Sudan. - 38 - the difference between the ex-factory and transport-inclusive-import prices, as a percentage of the import price, as a new measure of "nominal protection" for the commodity. In effect, this measures the degree to which ex-factory price control permits exploitation (in price terms) of the protection con- ferred by trade/fiscal regimes. 57. Table 8 compares our measure of nominal protection (C) with cor- responding nominal protection estimates by Naseem (A) and the IBRD Industry Report (B). Because of much greater product comparability we focus on the comparison between our estimates and those in the IBRD Report. The differences are quite striking. In most cases our estimates of "nominal protection" are less than those in the IBRD Report; for six products our estimates indicate negative nominal protection. For three products (canned tomato paste, laundry soap and refrigerators) our estimates are higher, suggesting that ex-factory price control permits full exploitation of the nominal tariff protection (net of excises) as well as some of the QR-induced premia for these products. As we have no way of knowing whether our small sample of products is representative, we cannot generalize about the direc- tion in which previous protection estimates for all the other commodities should be corrected. 58. The differences between our estimates of "nominal protection" and those by the IBRD Report imply differences (in the same direction) for cor- responding ERP estimates. The problem in computing ERP estimates for the products we have singled out is the absence of input data at our level of disaggregation. However, for some products we make the assumption that the input structure is identical to that underlying the IBRD estimates for the corresponding (somewhat more widely defined) sector. On that basis, and using Table 3: NOMINAL 2ATES OF PRCIECTION FOR SELECTED INDUSTRIAL PRODUCTS, 1971 (Alternative Estimates) Import Price Nominal Rates of Protection S ITC Ex-Factory Import plus 15% A 1/ B 1/ C 1/ CODE Commodity Unit Price Price Transport _largin (x) (1) (2) (3) (4) (5) (6) (7)M (3)' 10 3113 Canned Tomato Paste kilo 0.32/ 0.1 0.1 84.6 60.0 250.0 3115 Cotton Seed Oil m.t. 122.5 156.0 179.4 84.6 23.3 -36.5 3118 Sugar m.t. 52.5 46.4 53.4 84.6 0 -1.9 3133 Beer litre 0.15- 0.12 0.14 125.0 25.0 8.3 3211 Cotton Grey Cloth yard 0.09 0.06 0.07 62.9 55.0 33.3 3211 Cotton White Cloth yard 0.09 0.08 0.09 62.9 55.0 0.0 3213 Knitted Cotton Underwear doz. 1.7 1.7 2.0 62.9 70.0 -17.7 3231 Tanned Cowhide sq. metre 1.7 3.1-J 3.6 38.7 34.5 -61.3 3512 Insecticides kilo 0.7 0.4 0.5 10.8 n.a. 50.0 5/ 3521 Paints gallon 1.5 1.2-/ 1.4 87.0 n.a. 8.3 3523 Laundry Soap m.t. 157.0 76.0 87.4 87.0 87.0 91.6 3523 Toilet Soap m.t. 479.0 699.0 803.9 87.0 87.0 -46.5 3692 Cement m.t. 10.2 18.0 20.7 40.0 n.a. -58.3 3829 Refrigerators 10 cu.ft. 95.0 53.4-/ 61.4 39.9 40.0 62.9 1/ A: Naseem estimate, B: IBRD industrial sector mission estimate, C: Our estimates based on columns (2) - (4). 2/ Price converted from 10.33 per tin of 95 gm. 3/ Price converted from 1l.214 for 12 bottles of 0.67 litres each; excludes excise duty of 11.896/dozen bottles, but inc-ludes 150.420 of deposit. 4/ Converted from kilogram to sq. metre by at 7 lbs. for 1.25 sq. metre. 5/ Converted from kilos to gallons by conversion factor of 11 lbs. to the gallon. 6/ Per unit, capacity not specified. - 40 - the information underlying the IBRD estimates, we have computed ERPs for a handful of commodities, employing our estimates of nominal protection. These are juxtaposed with the IBRD and Naseem estimates in Table 9. 59. We do not wish to make too much of these recomputations. Our data on import prices are particularly fragile, based often on low import volumes, which have been sporadically permitted through the QR system to deal with occasional acute scarcities. And often these irregular imports are under bilateral trade agreements which undermine their use as representatives of "international market prices." Nor do the data permit allowances for quality differences between domestic and imported commodities; generally these would work against domestically produced commodities. Even more important, our anal- ysis does not vitiate a central conclusion of the IBRD Report, namely, that the trade and fiscal regimes harbor a complex incentive system, characterized by sharply divergent levels of ERPs for different industrial activities. Our recomputations are simply designed to emphasize that ex-factory price control does seem to play a significant role in constraining or permitting the ex- ploitation, by domestic manufacturing firms, of protection implicit in the trade and fiscal systems. 1/ C. Industrial Licensing and Resource Allocation 60. In sub-section B, we examined the effects of trade, fiscal and price policies on the incentive structure guiding resource allocation in Sudanese industry. We concluded that the cumulative effect of these policies 1/ As we shall see later, effective ex-factory price control does not necessarily mean that consumers enjoy low prices despite heavy trade protection. it is quite possible that final retail prices do take advantage of trade protection, implying high profits for commercial establishments. - 41 - Table 9 : ALTERNATIVE ESTIMATES OF EFFECTIVE RATES OF PROTECTION FOR SELECTED INDUSTRIAL PRODUCTS. 1971 1/ Corresponding Effective Protection Rates- (%) CommoditX SITC Code (A)2/ (B)2/ (C)2/ Canned Tomato Paste 3113 229 * * Sugar 3118 229 0 -5 Beer 3133 * 32 -5 Cotton Grey Cloth 3211 40 (355)-! (135)- (265) (109) (204) ( 87) Knitted Cotton Underwear 3213 40 * -42 Refrigerators 3829 253 350 * 1/ * indicates negative value added at international prices. 2/ A = Naseem estimates B = IBRD Report estimates C = Our estimates 3/ Follows IBRD assumptions of: (i) 17% of raw material has 15% nominal protection (ii) 83% has nominal protection of 0, -10% and -20% in three successive cases. - 42 - was to create widely divergent effective rates of protection for different lines of industrial activity. Such divergences constitute prima facie evidence that the structure of incentives in Sudanese industry does not encourage resource allocation according to comparative advantage. 61. But whatever the resource-pull signals implicit in the incentive policies discussed above, the actual allocation of resources in industry has long been subject to licensing. It is quite possible that such screen- ing has eliminated, or at least reduced, wasteful resource-use patterns in response to the distorted incentive structure. At least up till 1971, there seems to be some support for this view. Table 10 records the distribution of fixed assets by sub-sector as found by the IDCAS Survey. Some two thirds of fixed assets were in a handful of sectors in which it is difficult to deny Sudanese comparative advantage. The percentages of fixed assets in these six subsectors were, respectively: Edible Oil Mills 6.7 Flour Mills 3.1 Sugar 16.8 Spining and Weaving (cotton) 19.6 Cotton Ginning 12.9 Cement 7.3 Sub-total 66.4 If we include printing, beer and leather shoes as viable import substitution candidates, the total rises above 70%. Relative to many developing countries which have followed the import-substituting industrialization path, this is a good record. - 43 - Table 10: Distribution of Fixed Assets in Industry, 1971 Fixed Assets SITC at Cost Percent Code Sector (E Sud. Thousand) of Total 31i2 Milk products 2330.1 2.6 3113 Fruit & vegetable canning 2216.7 2.5 3115 Oil mills 5925.6 6.7 3116 Flour mills 2748.3 3.1 3117 Bakeries 668.6 0.7 3118 Sugar 14870.9 16.8 3119 Confectionaries 898.5 1.0 3121 Other food products 414.6 0.5 3131 Alcoholic drinks 309.7 0.3 3133 Beer 1223.9 1.4 3134 Soft drinks 992.7 1.1 3140 Tobacco 944.9 1.1 Total 33544.6 37.8 3211 Spinning & weaving 17414.3 19.6 3213 Knitwear 591.9 0.7 3219 Ginning factories 11400.3 12.9 3220 Ready-made clothes 280.8 0.3 3231 Tanneries 698.4 0.8 3233 Leather products 19.4 - 3240 Leather shoes 1615.3 1.8 Total 32020.5 36.1 3311 Wood products 173.6 0.2 3320 Wooden furniture 465.9 0.5 Total 639.5 0.7 3412 Packing materials 1519.3 1.7 3420 Printing industry 2649.4 3.0 Total 4168.7 4.7 - 44 - Fixed Assets SITC at Cost Percent Code Sector (E Sud. Thousand) of Total 3511 Basic chemicals (liquid air) 24.2 - 3512 Insecticides 155.4 0.2 3521 Paints 96.1 0.1 3522 Drugs 537.9 0.6 3523 Soap, detergents & perfumes 820.4 0.9 3529 Other chemical products 577.0 0.7 3530 Petroleum refinery 5766.6 6.5 3559 Canvas shoes 77.2 0.1 3560 Plastic products 438.0 0.5 Total 8492.9 9.6 3620 Glass products 472.8 0.5 3692 Cement and gypsum 6491.5 7.3 3699 Building materials 266.2 0.3 Total 7230.4 8.2 3720 Basic metal products, other than steel 278.4 0.3 3812 Metal furniture 154.6 0.2 3813 Construction & engineering work 242.9 0.3 3819 Other metallic products 957.8 1.1 3829 Electric home appliances 439.7 0.5 3839 Batteries 208.0 0.2 3843 Car assembly 242.0 0.3 Total 2245.1 2.5 3909 Other manufacturing products n.e.c. (zipper manufacturers) 34.0 GRAND TOTAL 88654.0 100.0 Source: IDCAS Survey for 1971. - 45 - 62. But we must point to some difficulties with this sanguine view. First of all, intra-sectoral misallocation of even a quarter of industrial fixed assets is a heavy cost for a capital scarce country. Secondly, even if the licensing system had reduced misallocation up till 1971, this is no reason for defending the present structure of incentives. After all, we have to question an incentive structure whose signals hinder rather than help a rational allocation of society's resources. Perhaps most importantly, we have to recognize that even though over 70% of fixed industrial assets seems to be in the "right sectors", this is not guarantee that the capital stock is being efficiently used. The high levels of capacity underutilization and such facts as continued losses recorded by Sudanese textile companies (despite heavy effective protection) certainly indicate the opposite. In part, at least, the inefficient use of resources in the "right sectors" (and in the "wrong" ones) is fostered by the policies discussed earlier, such as the "residual allocation" of foreign exchange for current uses. - 46 - IV. Incentive Policies within Agriculture 63. As in the case of industry our discussion of incentive policies within agriculture will focus on interventions relating to the product markets. A. Allocational Relevance of Price Signals in Sudanese Agriculture 64. In very broad terms agricultural production in Sudan can be parti- tioned into three main organizational modes: (a) State-managed, participatory irrigation schemes (like the Gezira) exploiting the Nile waters; (b) Large-scale, private, mechanized farming of the clay plains, which stretch across the middle of Sudan; and (c) Relatively small-scale, traditional farmers in the Western savannah and the South. There is no question that product prices (for outputs and inputs) are major determinants of allocation decisions in the last two organizational forms. Within the state-managed irrigation schemes commodity price signals are modified by the decisions of the Managing Boards. We touch upon some special aspects of these public schemes in sub-section D, below. 65. There is also a fairly clear division between those key crops which are primarily produced on the public irrigation schemes (long staple cotton, sugarcane and wheat) and those which are primarily produced in large or small private farms (sorghum, sesame, groundnuts and gum arabic). 1/ I/ Owing to lack of comparable data the livestock sector is excluded from this analysis, as are several crops like dukhn (millet), cassava and rice, which are of secondary importance. - 47 - Following from above, the allocation of resources among the latter set of crops is much more immediately sensitive to incentive signals than is the allocation among the former group. B. Determinants of the Incentive Framework 66. The main policy determinants of the structure of incentives are: (a) Foreign trade taxes, subsidies and quotas; (b) Producer price policy/marketing arrangements; and (c) Local taxation. Foreign Trade Taxes, Subsidies and Quotas 67. In Section II we gave a general account of the foreign trade/ payments regime. We need only add a few comments specific to agricultural production here. First, and in contrast to the industrial sector, QRs play only a small role on the output side of agriculture. Of the four major crops produced on private farms, three are regular export items and the other (sorghum) an occasional one. Occasionally, QRs in the form of export bans affect the market for sorghum, and more frequently, the one for meat. As for the crops grown on the public schemes, cotton is the main Sudanese export; and though wheat and sugar are imported under QRs, the implicit tariffs do not influence production decisions, because the government fixes the into-mill price of both crops. On the input side of agriculture, QRs may raise the final purchase price of imports like agricultural equipment, jute sacks, insecticides and fertilizers above the tariff-inclusive landed cost. 68. The export duties and royalties on agricultural products are important sources of divergence between international and domestic producer prices. So is the 15% export subsidy implicit in the Exchange Tax/Subsidy - 48 - scheme, except when it is denied, as on cotton and gum arabic. But, for the reason cited above, import taxes have little influence on the producer prices for import substitutes like wheat and sugar. Import taxes, do, of course, affect the prices of agricultural inputs. Producer Price Policy/Marketing Arrangements 69. Policies affecting the pricing and marketing of agricultural com- modities are formulated by separate units of government which take decisions in isolation, even though the Minister of Finance and National Economy must approve all agricultural price decisions. This is an important structural weakness in framing coordinated relative price policies within agriculture. The supply wing of MinFin advises on the into-mill price of domestic wheat. The Sugar Corporation, in effect, sets the into-mill price of sugar cane. While the f.o.b. cotton price depends on world market conditions and the r4arketing strategy of the State Cotton Marketing Corporation, the "producer price" for cotton is a concept made slippery by the intricacies of the "joint- account" system in Gezira and other public schemes. The export marketing of the three main export crops grown on private farms (groundnuts, sesame and gum arabic) is now organized through the semi-public Oilseeds and Gum Arabic Corporations, respectively. But the producer price policies for these crops are set by the Foreign Trade wing of MinFin. A further word on this. 70. For these three crops, MinFin's Foreign Trade wing, in conjunction with the relevant marketing corporation, sets minimum prices in wholesale markets. These prices vary by region to allow for differences in transport costs. If the price offered by the private traders to farmers (or more local traders) falls below this floor, the marketing corporation is obliged - 49 - to purchase directly at these minimum prices. 1/ Private traders who buy from the farmer at or above the price minimum are obliged to sell to the relevant marketing monopoly. A maximum price for this latter transaction is also announced by MinFin. Obviously, if the price for a product is set too low (in relation to some border price-relative norms) production is discouraged, and smuggling is encouraged. 2/ A classic recent example of the latter was the heavy smuggling of gum arabic to Ethiopia in the 1973-74 crop season, induced by the excessively low prices set by the Gum Arabic Corporation. 71. We should also make a point on the timing of price decisions. If these price-setting exercises are to influence production, they have to be announced in advance of the sowing season. In fact, the prices have generally been announced near harvest time, and sometimes revised after that. As a result, their main influence has probably been on the smuggling vs. legal export decisions and on future price expectations. Local Taxation 72. Local taxation (ushur) is generally levied at an ad valorem rate on marketed production. The effective rates tend to differ across both crops and regions. The inter-crop differences contribute to departures from international price relatives. The inter-regional differences are generally associated with the prosperity of the regions: higher rates in 1/ This is how the system is supposed to work. Actual operations may be somewhat different. 2/ Though quantitative estimates are not available, smuggling is believed to be an important problem in Sudan. This is hardly surprising given the long land borders and inadequate internal communications. - 50 - more prosperous areas. Though this interferes with the exploitation of inter-regional comparative advantages, it does further inter-regional equiLy objectives. C. Effective Producer Prices and Intra-Sector Incentives 73. Ideally, we would have liked to estimate the effective protection/ promotion implied for different crops by the above policies, in a manner analogous to our discussion of ERPs within industry. But such an enquiry would require information on current input structure by crop. Given existing trade taxes on commodity inputs, different input structures would imply different average effective taxation of current inputs relative to inter- national prices, which in turn would imply different degrees of protection to primary factors, even if producer crop price relatives were in line with international prices. Unfortunately, the mission did not obtain detailed information, by crop, of per unit use of current inputs like fertilizers, insecticides and other chemicals, jute sacks, fuel for agricultural equipment and spares. I/ Consequently, our discussion of policy-induced departures from international prices is limited to a comparison of effective crop producer prices. 74. As in the discussion of the industrial sector, our use of inter- national prices as norms rests on the notion that they represent (at least approximately) the transformation possibilities through foreign trade. Strictly speaking, this would be true if Sudan were only a marginal importer 1/ To include the input side in the analysis of intra-sector incentives, we would also have to take account of widely divergent technologies: mechanized vs. traditional. - 51 - or exporter of the commodities in consideration, that is, if the "small country assumption" were valid. In that case, and if economic efficiency were the sole objective, it would be appropriate for domestic resource allocation to be guided by the relative international price configuration. Conversely, we could judge departures of domestic price relatives from international ones as sources of inefficient resource allocation. As we shall see below, this pristine view has to be modified whenever the "small country assumption" becomes tenuous. 75. Table 11 presents data, for recent years, on effective producer prices for the major crops in relation to the corresponding export or import parity equivalent. 1/ A few explanatory comments are in order. The inter- national parity equivalent, in each case, is based.on unit c.i.f. or f.o.b. prices from trade accounts (at the official exchange rate) with due allowances for handling, storage, transport, etc. The "producer prices" are wholesale market prices for all private farm crops, while for the others they are either mill prices (wheat and sugar) or a special construction (cotton). The differences between the international parity equivalents and producer prices are due to export taxes, local commodity taxes-and marketing corporation profits (again excepting the special case of long-staple cotton). 76. A glance at Table 11 reveals that for all crops producer prices have been below international parity equivalents, with the gap (line (d) for each crop) ranging from 15-17% for oilseeds to 30-40% for gum arabic and wheat, and even higher for sugar in recent years. We can regard this downward bias 1/ Unfortunately, the information on sugar relates to its refined form (which, strictly, is an industrial product) not cane. - 52 - Table 11: Effective Producer vs. International Prices of Major Sudanese Crops (All prices in E Sud. per metric ton) A. Crops Grown Mainly on Private Farms 1971/72 1972/73 1973/74 1. Sorghum (a) Export Parity Equivalent 17.6 n.a. n.a. (b) Producer Price (Gedaref) 15.5 - (c) Producer Price as % of Export Parity Equivalent 88 - - (d) Implicit Tax Rate % 12 2. Sesame (a) Export Parity Equivalent - 100.8 (b) Producer Price (Gedaref) - 83.4 (c) Producer Price as % of Export Parity Equivalent - - 83 (d) Implicit Tax Rate % 17 3. Groundnuts (a) Export Parity Equivalent 42.1 46.6 81.8 (b) Producer Price (El Obeid) 36.3 40.3 67.1 (c) Producer Price as % of Export Parity Equivalent 86 86 83 (d) Implicit Tax Rate % 14 14 17 4. Cum Arabic (a) Export Parity Equivalent 158.7 166.6 202.3 (b) Producer Price (El Obeid) 105.3 112.6 143.9 (c) Producer Price as % of Export Parity Equivalent 66 67 71 (d) Implicit Tax Rate % 34 33 29 - 53 B. Crops Grown Mainly on Public Schemes 1971/72 1972/73 1973/74 5. Cotton (a) Export f.o.b. Value (E million) - 67.6 71.8 Less (bl) Export Duties (Eb million) Less (b2) Profits of Agricultural - 6.5 5.7 Schemes (E million) - 11.0 8.2 (b3) "Producer Value" (E million) - 50.1 57.9 (c) "Producer Value as % of Export Value" - 74 81 (d) Implicit Tax Rate % - 26 19 6. Sugar (refined) (a) Import Parity Equivalent 61.5 90.0 113.4 (b) Producer Price (Khartoum) 47.6 54.3 54.9 (c) Producer Price as % of Import Parity Equivalent 77 60 48 (d) Implicit Tax Rate % 23 40 42 7. Wleat (a) Import Parity Equivalent 34.4 50.7 97.9 (b) Producer Price (Gezira) 32.3 35.0 58.9 (c) Producer Price as % of Import Parity Equivalent 94 69 60 (d) Implicit Tax Rate % 6 31 40 Sources: Appendix Tables 5-9, except for cotton which uses information from Customs returns and MinFin's fiscal accounts. - 54 - as a cumulative implicit tax (some or all components may be explicit). On this basis we conclude that all these crops have been subject to sizeable taxation in recent years, and some, particularly gum arabic, wheat and sugar, more than others. This implicit output taxation, when coupled with our knowledge that commodity inputs are also taxed, leads to the conclusion that returns to primary factors in all these crop activities have been subject to substantial effective taxation (or negative effective protection), in contrast to the protection granted to industrial activities (for a fuller comparison see Section V). 77. Furthermore, different rates of implicit taxation across crops indicate that present incentive policies distort the domestic structure of crop price relatives away from the corresponding international ones. As a first approximation, this suggests that current domestic price patterns are inhibiting Sudan from making efficient use of its international trading opportunities. But at this point we pause to note that in several crops, particularly long-staple cotton, gum arabic and (perhaps) sesame, Sudanese exports do not face perfectly elastic foreign demand. This in turn implies that international transformation opportunities should be measured, not by the parity price, but by marginal export revenue, which, by definition, will be below the parity prices, when demand is less than perfectly elastic. What this means is that an efficient crop price pattern in agriculture would require the relative domestic price for these crops to be lower than their relative international price. Thus, taking 1973-74 as an example, a 12% lower price (12% higher implicit tax) for gum arabic relative to groundnuts may not be unjustified by differences in structure of external demand. But - 55 - this argument should not be taken too far. Certainly, it cannot be applied to the 40 percent implicit taxation of wheat, a product in which Sudan is a marginal importer. This taxation obviously breaches allocation efficiency; it clearly arises from a desire to subsidize domestic consumers with low retail prices of flour and bread, in turn requiring a low into-flour-mill price, to permit the mills to stay in business. 78. To sum up, the existing incentive policies seem to engender a set of commodity producer prices which is associated with: (a) sizeable implicit/explicit taxes on agricultural crops, relative to their international parities; (b) undetermined levels of input taxation through import taxes and, possibly, QR-induced premia; (c) these together imply significant effective taxa- tion of value-added in crop activities; and (d) significant inter-crop differences in implicit taxation, which inhibit an efficient inter-crop allocation of resources, even after making required allowances for differences in external demand conditions. Perhaps as important as these quantitative conclusions is the finding that the administrative procedure and responsibility for designing the relative price framework in agriculture are severely fragmented. D. Public Irrigated Agricultural Schemes: Special Aspects 79. The agricultural parastatals are partnership arrangements between tenants, who are responsible for supplying labor (their own or hired), the - 56 - Government, which provides land and irrigation, and a managing board which supervises all aspects of the scheme. Cotton is usually the "joint account" crop. Inputs provided jointly for the scheme under the managing board's supervision include land preparation, inspection and extension services, fertilizers, spraying of pesticides, ginning, bailing and transport of cotton. Since 1966, some of the labor costs, originally borne by the tenant, have also been charged to the "joint account". All these joint costs are charged against gross sales revenue from cotton and the profits distributed amongst the partners according to agreed proportions. For the other crops in the rotation the tenant bears much (but not all) of the cost and appro- priates all the sale proceeds. 80. The schemes are run somewhat as a vertically integrated enterprise by the managing board, the crucial allocative agent. The board decrees the cropping pattern, within each tenancy, for every crop year. It ensures the delivery of machine services, water and current commodity inputs at the right times and right places according to a detailed program. The only productive factor over which the tenant retains control is his own and hired labor. 81. This perception turns the analysis of factor allocation response to agricultural commodity prices into a two-stage problem: - the inter-crop allocation of land and complementary capital, where the managing board is the allocative agent; - the inter-crop allocation of labor, where the tenant plays the main role. - 57 - Inter-Crop Allocation of Land 82. Clearly, if commodity prices are to play an important allocative role, the Board has to be sensitive to them. The experience of recent years has highlighted the slowness with which the boards alter cropping patterns in response to changing commodity prices. Taking the Gezira as an example, this sluggishness can be explained by the Board's preoccupation with cotton, the only joint account crop, and hence the only crop in whose income the Board has a share. When relative prices move against cotton and in favor of other cash crops like oilseeds and wheat, the Board is slow to adjust cropping accordingly, since it foresees budget problems for itself if acreage is shifted out of cotton. Inter-Crop Allocation of Labor 83. The present system also distorts incentives for inter-crop labor allocation. Leaving aside changes in relative prices, the joint account system discourages producers from allocating labor to cotton. This is because the tenant only receives forty-odd percent of the "net income" from cotton, while he retains the entire sales proceeds from other cash crops like wheat, groundnuts and vegetables. And this bias has been increasing steadily over time, as the joint account costs encompass more and more of field opera- tions, 1/ which were formerly on the tenants' own account, including some operations related to non-cotton crops. This process has reduced the rate of "net income" from cotton, and increased tenants' real net income from other crops. 1/ Farah Hassan Adam, "The Sharing Arrangement in 3 Agricultural Corpora- tions of the Public Sector in Sudanese Agriculture", Department of Rural Economy, Research Bulletin No. 17, 1970. - 58 - 84. Furthermore, when it comes to changes in relative prices, the variations in the cotton price are transformed, by the joint account system, into much larger percentage changes in "net income" per unit of cotton. Consequently, while the reallocation of land in response to relative price changes is too slow, the reallocation of labor may be too fast. Joint Account vs. Land/Water Charge 85. The above difficulties with the incentives for labor allocation under the public agricultural schemes as presently constituted have led to the suggestion of a Land and Water Charge (LWC) alternative. As proposed (and accepted in the Rahad project) this would substitute for the present joint account revenues of the Government and the managing board. The LWC is to be levied as a flat fee per unit of land. 1/ It is considered as a service charge to government for the provision of irrigated land. 2/ In addition, in the Rahad model, the costs of common operational services such as various stages of land preparation, spraying, etc., are charged to all crops. 86. Compared to the present Gezira system, the LWC approach removes the labor allocation bias against cotton. And since the Board's income is no longer cotton-specific, it has no particular reason to delay shifts out of cotton, if product prices point in that direction. But even though the land allocation bias in favor of cotton is gone, it is not clear that the LWC system strengthens the incentives for a speedy response to changing relative 1/ To the extent it is a uniform land-related cess, and does not allow for differences in soil fertility etc., the LWC does not help inter-tenant equity. 2/ Note that as long as the LWC does not vary with water use, it performs no separate rationing of that resource. - 59 - product prices. After all, the Board's income is now guaranteed; it does not depend on gross profits of the scheme. 1/ It is therefore important to keep the Board's cropping pattern decisions flexible and open to pressure from tentants, whose net income is sensitive to the cropping choice. 1/ An alternative system, which would be neutral (inter-crop) with respect to both land and labor allocation, and would give the board a direct stake in the scheme's income, would be to extend the "joint account" to all crops in the scheme. But the problems of policing the monopoly marketing of crops other than cotton may make such a scheme difficult or impossible to impiement. - 60 - V. Inter-Sectoral Bias in Incentive Policy 87. Thus far we have dwelt on the implications of the incentive struc- ture for resource allocation within major sectors. We turn now to address a broader question outlined in the Introduction: Does the current policy framework harbor any overall incentive bias in favor of agriculture or industry? Needless to say, our attempt to formulate a quantitative response will be based on even more fragile data than employed hitherto. But nevertheless we believe that our analysis is instructive and the results correct within broad orders of magnitude. Our basic approach is the same as the one we employed within sectors, namely, to estimate the effective protection (or taxation) conferred on different lines of activity by the totality of incen- tive policies. In this section, "line of activity" refers to broad production sectors. We begin with agriculture. A. Effective Protection (Taxation) of Agriculture 88. We draw upon our analysis in Section IV. As we noted there, we were precluded from calculating effective protection for different crops by the absence of data, by crop, on intermediate input structure. We do however have some information on the structure of inputs into crop agriculture as a whole. This, together with our previous estimates of implicit output taxation on the main crops, will form the basis of our present analysis. Owing to the limited coverage of our work on outputs, we cannot embrace the entire agri- culture sector; we confine our overall estimate to the five main cash crops (cotton, groundnuts, sesame, gum arabic and wheat) on which we have adequate - 61 - information. We choose 1972/73 for this analysis for several reasons: it is the latest year for which final production estimates, by crop, were avail- able; the world agricultural commodity boom had only just begun, so the price information is not too unrepresentative; and we had price estimates for all crops (except sesame, for which we use the 1973/74 data). Output Values 89. For the five crops listed in Table 12 we take the 1972/73 produc- tion estimates, and use our price information (from Table 11, Section IV) to compute two sets of figures: domestic value of output (at producer prices) and international value of output (at international parity equivalents). By adding across crops we obtain a total for each set of figures. Input Values 90. We obtained information on the structure of intermediate inputs into crop agriculture for 1970/71 (Table 13). 1/ We assume that this struc- ture of inputs holds for 1972/73. We also had information on total inter- mediate inputs used in modern and traditional crop agriculture in 1971/72 from published national income estimates (which include information on the producer value of crops in that year). From these elements, we constructed our estimates of the value of intermediate inputs used in our five crops (total) in 1972/73 at both domestic producer and international prices, as follows: (a) We first inflated the value of intermediate inputs used in modern agriculture in 1971/72 by 15% to make 1/ These estimates, unfortunately, exclude information on fuel and spares for agricultural machinery and pumps. - 62 - Table 12: Effective Protection of Five Agricultural Crops, 1972/73 (1E Sud. '000 except when otherwise stated) Gum Cotton Groundnuts Sesame Arabic Wheat Total Production ('000 m.t.) 651 545 340 45 200 Producer Price (E Sud./ton) 40.3 83.4 112.6 35.0 Domestic Value of Output 50100 21964 28356 5067 7000 112487 International Price (b Sud./ton) 46.6 100.8 166.6 50.7 International Value of Output 67600 25397 34272 7497 10140 144906 Domestic Value of Intermediate Inputs 14946 1/ International Value of Intermediate Inputs 11536 1/ Value Added at Domestic Prices (VAD) 97541 Value Added at International Prices (VAI) 133370 Effective Protection VAD-VAI 100) -26.9% VAI x 100) 1/ See text for basis of calculation. Sources: (1) Production data from Ministry of Agriculture & Arab Fund (2) Price information from Table 11. (3) Input value information from National Income Accounts and Supporting Tables, 1971/72, Annexes 3 and 5, published by National Income Division, Department of Statistics. - 63 - Table 13: Imported Agricultural Intermediate Inputs A. Structure of Inputs, 1970/71 1/ Agricultural Raw Materials Value at Current Prices Percent Share (ES '000) Fertilizer Manufactures 2880.1 19.9 Woven Fabrics Jute 653.1 4.5 Bags, Sacks Jute 5135.0 35.5 Hoop & Strip Iron 629.3 4.3 Chemical Material Products 4721.6 32.6 Cordage Hemp 94.8 0.7 Seeds for Sowing 228.2 1.6 Other 127.8 0.9 Total 14469.9 100.0 B. Import Taxes on Inputs, 1972/73 (%) Total Import Exchange Import Duty Rate 2/ Tax Tax Rate Fertilizers 17 15 32 Chemical Material Products 8 15 23 Jutes and Sacks 22 15 37 I/ From M.A. El Hindi, "Constant Price Estimates of Value Added of Agricultural Sector in Sudan, 1971/72", mimeo., 1974 2/ Average of effective import duty collection rates for 1972 and 1973 (Section II, Table 2 ). - 64 - it comparable to our 1972/73 data (this is based on the 15% nominal increase in agricultural crop value addcd between the two years 1/); (b) Since in 1971/72, according to national income figures, our five crops accounted for 81% of modern sector gross crop value, 2/ we took this proportion of the total value of intermediate inputs computed above, as our estimate of inter- mediates used in our five crops; (c) We then disaggregated this by commodity category on the basis of the input structure information we had for 1970/71. Though the latter is supposed to be for total crop agriculture, it is likely to be more representative of modern agriculture, since it consists solely of imported inputs; 3/ (d) Using information on effective import tax rates for 1972 and 1973 for the major input categories, 1/ Provisional estimates by the Department of Statistics. 2/ One of our crops, groundnuts, is also produced in "traditional" agri- culture; but we do not think this introduces significant error in our calculation. 3/ By ignoring domestic intermediate inputs and some imported inputs like fuel, we underestimate total intermediate input use. This turn means that we overestimate value added in both domestic and international prices. In the present situation, where both inputs and outputs are taxed relative to international prices, this means that the true rate of negative effective protection is even higher (more negative) than our estimate suggests. - 65 - we deflate the corresponding domestic input value figures to obtain an estimate of total intermediate inputs at international prices for our five crops. 91. We now have all the ingredients of an effective rate of protection computation. Putting it together gives the answer that the average effective rate of protection in 1972/73, for the five cash crops we singled out, was -27%. Equivalently, the prevailing incentive policies exacted an effective tax of 27% on value added in these five crops. This is a substantial rate of discouragement by any standards. True, the estimate is restricted to five cash crops. But these crops (in 1971/72) accounted for four-fifths of modern sector gross crop output and nearly half of total (including tradi- tional) crop output. And when one recognizes that it is the development of these cash crops which must form the base of future Sudanese economic growth, the judgment on the structure Qf incentive policies has to be adverse. B. Effective Protection of Industry 92. For comparison, we now try to arrive at a similar "average" figure for effective protection to indu8try. As our basis we take the ERP estimates of the IBRD Industrial Survey Report. We have already noted that these esti- mates are biased downwards because they take no account of premia induced by QRs, and biased upwards because they generally neglect ex-factory price con- trol. But given existing data limitations they remain the best available ingredients for attempting an average estimate. - 66 - 93. The IBRD Report computes ERPs for commodities whose value added aggregates to 57% of total value added in the firms surveyed by IDCAS. 1/ Seven of the commodities it covers were estimated to have negative value added at international prices, which precluded meaningful estimates of ERPs, and they therefore had to be excluded from our average measure. 2/ Excluding these seven products leaves about 35% of total industrial value added at factor cost (as surveyed by IDCAS) for 1971 in our sample. Using the domestic value added in each of our commodities (Table 14) as weights, we compute the average ERP provided to these commodities (for "spinning and weaving" and "leather tanning"), we pick the lowest of alternative estimates presented in the IBRD Report. 94. The estimated average effective rate of protection to the products in our sample turns out to be 170%. This is an estimate based on 1971 information. Since then, further tariff concessions to approved industries on imports of raw materials under new Industrial Development Acts have undoubtedly increased the level of average effective protection. We compare our 170% estimate for industry with the previous -27% average estimate for agriculture. Despite all the undoubted limitations of the data and our methodology, the overall conclusion seems to be inescapable: The structure of incentive policies in the Sudanese economy provides considerably greater induce- ment for allocation of resources to industry than to 1/ The IDCAS 1971 survey was limited to establishments employing more than 25 (more than 100 outside the Three Towns area). 2/ As noted in Section III, negative value added at world prices points to a distorted incentive structure, but it defies measurement. - 67 - Table 14: Value-Added and Effective Protection Rates by Sub-sector, 1971 (E Sud) (1) as % of Total Effective Rate Value Added Value Added in All of Protection at Factor Cost Industrial Branches (ERP) (Z) (1) (2) (3) 3112 Milk products 292598 1.1 49 3113 Fruit & vegetable canning 280460 1.0 * 2/ 3115 Oil mills 2964561 10.8 * 3116 Flour mills 865881 3.2 * 3118 Sugar refinery 1278879 4.7 0 3133 Beer 471934 1.7 32 3140 Tobacco products 517623 1.9 * 3211 Spinning, weaving & finishing 4088209 14.9 204 3213 Knitwear 352612 1.3 * 3220 Ready made clothes 201320 0.7 783 3231 Leather tanning & finishing 372385 1.4 112 3233 Leather products (except shoes) 56134 0.2 67 3240 Shoe industry 1485729 5.4 236 3412 Containers & packing materials 713138 2.6 77 3523 -Soaps, detergents & perfumes 455453 1.7 * 3560 Plastic products 273919 1.0 322 3620 Glass products 199717 0.7 100 3829 Refrigerators & air conditioners 247201 0.9 350 3839 Car-batteries 144535 0.5 38 3843 Truck assembly line 294438 1.1 * Total 15556726 56.7 1/ As recorded in 1971 IDCAS Survey; E27,450,848 2/ * Indicates that value added at international prices is negative Source: A Survey of the Industrial Sector of Sudan, IBRD, 1974. - 68 - agriculture. So these policies work against the efficient exploitation of Sudan's oft-diagnosed long-term comparative advantage in agriculture. C. Protection for the Commerce Sector 95. We have, so far, analyzed the incentives for factor allocation within and between two major productive sectors in the Sudanese economy. We should also devote some attention to the Commerce sector, which in 1972/73 is credited witn generating twice as much value added as industry and more than half of the amount attributed to agriculture. 1/ And even this is likely to be a sericus underestimate since the national income estimates are based on the legislated profit margins for trade (recall Section II.B above), not on actual profits which are generally believed to be much higher. 96. Unfortunately, the commerce sector does not lend itself to quanti- tative analysis. "Output" is a diffuse concept here. And there is every reason to understate incomes and profits in this sector and no reason to overstate them. Nor do the business tax accounts provide much guidance, since the collections from this sector are mostly based on presumptive assessments, not on a careful audit, which is precluded by a weak tradition (and lack of legislation) of keeping and maintaining accounts. Though quantitative esti- mates are lacking, we have several good reasons to believe that the commerce sector occupies a privileged and protected position in the economy. 97. First, the trading sector is clearly well positioned to reap many of the scarcity rents created by tight import controls, for the import licensing system gives it direct access to the scarce foreign commodities. I/ For 1972/73 sectoral GDP estimates at market prices in Sudanese i z1ilion were: Agriculture = 258; Mauufacturing = 79; Commerce = 147. - 69 - Though in principle trading profits are controlled by the unit profit margin maxima legislated in the 1966 Price Control Ordinance, in fact this ordinance is honored more in the breach. Some idea of the effectiveness of price control may be gauged from the data in Table 15. Though the table refers to domestically produced items mostly under direct retail price control (recall the distinction from Section II.B), all indications point to a similar state of affairs for commodities under the general profit margin controls. 98. Second, the trading sector probably benefits greatly from the import controls imposed to protect domestic manufacturing. We noted in Section III how the system of ex-factory price control sometimes prevents domestic manufacturing firms from taking full price advantage of the implicit protection conferred by the QR system. But whereas ex-factory price control is relatively easy to apply, the controls weaken at subsequent stages of distribution, permitting the traders to appropriate much of the margin between the ex-factory, controlled price and the market-clearing retail price. 1/ 99. An indication of the economic power and sophistication of the Sudanese trading sector can be obtained by a glance at the history of the "Nil Value" import license system. It began in April 1972 to permit residents to repatriate, in commodity form, foreign exchange held abroad. 2/ Within the first year of 1/ It may be thought that the system of profit margin maxima for each distinct stage of distribution would create incentives for an economic agent at one stage to police the earlier one. In fact, such complaints are subject to the sanction of disrupted supply. In any case, in a heavily protected system, there is room for all stages to make "super- normal" profits. 2/ Such holdings would accumulate through business links with Sudanese residents in foreign countries, chiefly in the Gulf area. - 70 - Table 15: Controlled and Actual Retail Prices for Selected Commoditics (February 1975) (b Sud) Percent Excess Controlled Actual of Actual Commodity Unit Price Price Over Controlled Mutton kilo 0.38 0.70 84.2 Veal kilo 0.30 0.50 66.7 Beef kilo 0.27 0.45 66.6 Cottonseed Oil lb. 0.09 0.12 33.3 Butter Oil kilo 0.40 0.66 65.0 Cheese kilo 0.70 0.80 14.3 Dura (Sorghum) ruba 0.21 0.41 95.2 Fish kilo 0.24-0.36 0.80 & above 233.3-122.2 Cement ton 19-22 1/ 50.0 & above 163.2-127.3 Air Cooler (Model 4000) unit 108.8 2/ 164.0 51 1/ Depending on mode of transport from factory. 2/ Obtained by applying Price Controlled Ordinance permitted maximum margin (for electrical apparatus) of 25% to 1974 ex-factory price of L87.1 (supplied by Ministry of Industry). Sources: Controlled Prices from Ministry of Finance and National Economy, except when otherwise stated. Actual prices obtained by mission. - 71 - its operation, fiscal 1972/73, "nil value" imports amounted to b 17.2 million. In the subsequent year they were i 26.0 million or about 15% of total imports. And in the first seven months of fiscal 1974/75 these imports had cumulated to i 16.9 million, before the system was suspended for review. It is unlikely that such large sums only represent foreign exchange savings of Sudanese nationals. They were much more likely to constitute a "white" link in a cycle of illegal export-import-currency deals. 100. Indeed, it is possible to argue that the protection conferred on the commerce sector has drawn resources (especially entrepreneurial talent) from the productive sectors, and slowed the development of the latter. - 72 - VI. Incentives for Foreign Trade A. Norms for Trade Policy 101. In Section II we gave a synoptic account of the foreign trade/ paym..,nts regime. We now attempt to evaluate the incentives for foreign trade which are implicit in this regime, and we try to include the effect of some of the non-trade policies, such as agricultural pricing, which have profound implications for foreign trade incentives. Evaluation presupposes norms. A word on these is in order. 102. The prescription of classical economic theory is "unified exchange rates" -- a trade/payments regime in which the effective exchange rate (the number of domestic currency units earned or paid per unit of foreign currency) for all transactions is equated, after taking into account the operation of taxes, subsidies and quantitative restrictions. 1/ Under such a regime the incentive to earn a dollar of foreign exchange through exports is equated, at the margin, with the incentive to save a dollar through import substitu- tion, and within exports and imports the incentive is equal across commodity categories. The two main qualifications to this prescription are (a) cases where the country has monopoly power in foreign trade, when optimum trade taxes are indicated, and, more importantly, (b) that it embodies a static analysis with no thought to the evolution of comparative advantage. 103. On the side of imports, Sudan is a marginal importer of all com- modities, a "price-taker" in every sense. For some of its exports (notably 1/ Of course, the simplest unified exchange rate regime (barring the presence of monopoly power in trade) is a fully liberalized regime with no taxes and subsidies. - 73 - long-staple cotton, gum arabic and sesame) Sudan commands a significant share of world trade, but the scope for optimum tax intervention is severely limited by the presence of close substitutes (for example, medium-staple cotton and synthetics in one case and other vegetable oils in another) which ensure a fairly-price-elastic foreign demand pattern for these products. As for dynamic comparative advantage, it is difficult to find fault with past analyses which have stressed Sudan's long-term development potential as an agricultural exporter. For this to be exploited, incentives in the trade/payments regime should be at least neutral as between exports and import substitution and, if anything, biased in favor of exports. Using this norm we can evaluate the existing structure of trade policy. B. Bias in the Trade/Payments Regime Indices of Bias 104. The simplest index of bias is in terms of the effective exchange rates for exports (EERX) and imports (EERM). Bias = B = EERX - O(1+s ) 1+sx EERM O(l+t) 1+t m m where, 0 = official exchange rate per unit of foreign currency (dollar) s = effective average rate of export subsidy (tax is negative subsidy) t ' effective average rate of import tax. m Therefore, in terms of this index: B = I implies neutral trade/payments regime B > 1 export-biased trade/payments regime B < 1 import-substitution-biased trade/payments regime And in a particular direction, the percentage departure from unity would indi- cate the degree of bias. - 74 - 105. In a QR-controlled import regime, like Sudan's, this index needs some modification. Wherever the QRs are effective constraints they induce premia over and above the landed cost (import tax inclusive) of imports and the normal internal distribution margins. The final purchaser of imports has to surrender more Sudanese pounds per dollar than would be indicated by 0(1+tm); 1/ or, in other words, the effective exchange rate for imports is higher than O(1+t ). If p is the average QR-induced premium between the landed cost of imports and their domestic market price (making due allowance for normal internal distribution costs), as a ratio of c.i.f. import value, then we estimate EERM - 0(l+tm+p m) and recompute bias as B = EERX = 0(1+s X) = 1+s EERM 0(1+tm+pm) +t+Pm 106. In fact, for lack of data on domestic market prices of imports, we were unable to estimate p . Hence our estimates are confined to the simpler index of bias, which implicitly and arbitarily sets p = 0. This in turn means that we consistently underestimate the bias in favor of import substitu- tion (or, equivalently, overestimate the bias in favor of exports). Estimates of Bias 107. Table 16 records the estimates of bias in the trade/payments regime over the past five years. Columns (1) and (4) record the average effective import and export tax rates based on Customs information. All rates are relative to border values recorded at the official rate of exchange. Columns (2) and (4) show the implications of the Exchange Tax/Subsidy scheme which 1/ Unless of course the import license is directly allocated to the final purchaser (as in the case of domestic manufacturing units), who then enjoys the QR-induced premium. Table 16: Estimates of Bias in the Foreign Trade Regime Effective Import Tax Rate Effective Export Subsidy Rate Bias Degree % (B-1) (100) Import Exchange Export Exchange B = l+sx (minus is Year Tax Rate Tax Rate tm Duty Rate (-) Subsidy Rate SY 1+tm against exports) (1) (2) (3)=(l)+(2) (4) (5) (6)=(4)+(5) (7) (8) 1970 0.518 0.0 0.518 -0.074 0.0 -0.074 0.610 -39.0 1971 0.523 0.0 0.523 -0.080 0.0 -0.080 0.604 -39.6 1972 0.487 0.112 1/ 0.599 -0.076 0.030 1/ -0.046 0.597 -40.3 1973 0.390 0.150 0.540 -0.062 0.040 2/ -0.022 0.635 -36.5 l -4 1974 0.424 0.150 0.570 -0.070 0.040 -0.030 0.618 -38.2 1970-74 0.468 0.082 0.550 -0.072 0.022 -0.050 0.613 -38.7 Notes: 1/ Pro-rate attribution because Exchange Tax/Subsidy Scheme introduced in March. 2/ See text. Source: Column (1) and (4) frum Tables 2 and 3, respectively. Column (2) and (5): see text. - 76 - was begun in March 1972. For imports this is the straightforward 15%, except for 1972 where, because the measure was introduced a quarter of the way through the year, a pro-rate attribution has been estimated. The export subsidy side of the scheme is more complicated. The effective subsidy has been estimated by subtracting the net fiscal proceeds of the scheme (for the two fiscal years over which it has operated) from 15% of the corresponding export values (the amount of subsidy that would have been paid out had it not been denied to certain commodities: cotton and gum arabic), and taking the residual as a percentage of the export values. 1/ Columns (3) and (6) record values of t and sx using the above information. Columns (7) and (8) show the estimates of bias. 108. The data reveal a pronounced bias against exports, to the tune of nearly 40% when averaged over the past five years. Furthermore, the imposition of the Exchange Tax/Subsidy scheme in 1972 went only a small way towards reducing the degree of bias (from 40 to 35%), for the rather obvious reason that the export subsidy element of the scheme was severely limited by the exclusion of cotton and gum arabic. Finally, we must emphasize that these are underestimates of bias against exports becuase of our neglect of the QR-induced premia. 1/ 1972/73 1973/74 Mean (iS Million) (LS Million) Exports 127.4 132.6 15% of exports 19.1 19.9 Minus net proceeds of the Exchange Tax/Subsidy 13.8 15.0 Residual 5.3 4.9 Residual ratio of export values 0.042 0.037 0.040 (i.e. Effective export subsidy of Exchange Tax/Subsidy scheme is 4%). Source: Export values from Bank of Sudan Quarterly Bulletins; tax data from Minisrry ocf Finance and National Economy. - 77 - Bias and Inflation 109. The above discussion of bias in the trade regime would be adequate if there were no domestic or world inflation. But both are stark facts of recent economic life, and their implications for bias have to be considered. Let us first examine the effect of domestic inflation alone. Under fixed exchange rates, with no QRs, and making the "small-country" assumption (i.e. no significant monopoly power in world trade), the effect of domestic infla- tion is to increase the profitability of producing non-tradeables, relative to the tradeables. As between tradeables inflation has roughly neutral effects on exports and import substitutes: both become less profitable compared to non-tradeables. Put in another way, the EERs for both exports and imports decline in real terms. Whatever the pre-inflation export/import-substitution bias in the trade regime, it continues roughly unchanged. 110. But if imports are largely controlled by QRs, as in Sudan, this analysis has to be seriously modified. The excess demand in domestic markets bids up not only the price of domestically-produced non-tradeables, but also the prices of quota-restricted imports. Even though the nominal c.i.f. and landed cost of imports stays constant (under our assumptions of world price stability and fixed exchange rate) in Sudanese pounds, the domestic market prices of imports can soar as excess demand drives up the QR-induced premia (the pm)* There are no corresponding nominal price increases for exports. Consequently, domestic inflation, with QR-contolled imports, tends to increase the bias of the existing trade/payments regime against exports. 111. If world market prices are rising simultaneously, then it is the difference in rates of change of domestic and international price levels which is important to our analysis. To the extent domestic inflation outstrips world inflation, the prices of domestic non-tradeables and QR-controlled imports in- crease relative to exports and non-QR-controlled imports; or, equivalently, - 78 - to that extent the real EERs for exports and non-QR-controlled import sub- stitutables are reduced. 1/ 112. The quantitative assessment of these inflation-related aspects is plagued in the Sudanese situation by the absence of reliable price indices, not to mention some serious conceptual problems regarding the choice of appro- priate deflators. But we might get some flavor of the dimensions involved by looking at some crude price index comparisons. Table 17 records data on some recent price movements. Table 17: PRICE MOVEMENTS SINCE 1970 (All indices adjusted to 1970=100) Domestic Price Indices Cost of Living Index of Wholesale High Salary Low Salary International Prices (IIP) 1970 100.0 100.0 100.0 100.0 1971 96.6 101.2 101.4 106.7 1972 105.3 109.5 113.3 117.0 1973 122.4 126.7 132.7 136.9 1974 n.a. 155.2 1/ 164.9 1/ 154.0 1/ Averages for the year based on first ten months. Sources: Appendix Table 4 for domestic prices; International Economy Division, IBRD, for IIP. 113. Though we have included it for completeness, we regard the Sudanese wholesale price index as particularly unsuitable for measuring price changes of domestically marketed goods, because the index is heavily dominated by traded goods, and that, too, at border prices (i.e. exclusive of premia for the imported commodities). Comparing the C.O.L. indices with the IIP, it appears that up until 1973 domestic inflation was at comparable, or slower, rates 1/ This discussion of world inflation abstracts from the terms of trade shifts which are associated with relative price changes in world markets. These have separate, and profound, effects outside the scope of this analysis. - 79 - than world inflation. But in 1974 domestic inflation was at well over 20 percent, while the IIP rose only about 12 percent. So since 1970 the cumu- lative price level increase in Sudan has been broadly comparable to the world price level increase, indicating no significant difference between nominal and real EERs. But the recent acceleration of domestic inflation at sharper rates than world inflation will, if continued, reduce real EERs (that is, appreciate the currency) and increase the bias of the trade/payments regime against exports, for the reasons outlined above. C. Effects of Non-Trade Interventions 114. At least two kinds of non-trade policy interventions need to be considered in our analysis of bias: (a) domestic excise taxation and (b) implicit and explicit taxation of agricultural products through producer pricing and marketing arrangements. As the information for the latter is available only for 1972/73 and 1973/74, and that too on a fiscal year basis, we shall rework the bias estimates to reflect these non-trade policy elements only for 1973, using raw information for fiscal 1972/73 and 1973/74. Needless to add, the estimates which emerge from our sometimes crude computations should be treated as illustrative, not as definitive results of finely honed research. Domestic Excise Taxation 115. The effect of domestic excise taxation is to counteract, to some degree, the import-substitution incentives provided by the trade/payments regime. 1/ The three commodities which are both important in the import tax 1/ Since domestic excise taxes are rebated on exports, they do not consti- tute an additional source of effective export taxation. - 80 - statistics and excised are: petroleum products, cigarettes and sugar. For each our procedure will be to subtract the estimated excise tax rate from the corresponding import tax rate (as recorded in Table 2) and make the necessary downward adjustments in the average effective import tax rate (tm) which enters in our measure of overall bias. 116. The excise taxation of petroleum products, when averaged for 1972/73 and 1973/74, was at rates comparable to the import tax rates (averaged for 1973 and 1974, Jan.-Sept.) recorded in the trade data (see Table 2). Hence the reduction in tm recorded in Table 18 reflects an assumption that import taxes are fully offset by domestic excises for petroleum products. 117. The three specific excise tax rates on cigarettes average at 6S7.3 per kg., compared to an import tax total (import plus consumption duties) of 11.7 per kg. 1/ Hence, the reduction in tm in Table 18 reflects an offset of 62 percent (=(7.3/11.7)xlOO) of the import taxes collected on cigarettes in 1973. 118. Ex-factory sales of domestically produced sugar totalled L12.1 mil- lion for 1972/73 and 1973/74, while the value of excise duties collected was 64 million, indicating an effective excise duty rate of 33 percent. 2/ This is comparable to an effective import tax rate of 34.6 percent indicated by the Customs returns for 1973 (Table 2). Hence, as in the case of petroleum 1/ Customs Tariff, Customs Department, Sudan. 21 Production Ex-factory Price Sales Excise Duties 1972/73 112,000 tons b52 ton L5.8 million 11.9 million 1973/74 120,972 tons b52 ton L6.3 million I2.1 million Sources: Sugar Corporation and Ministry of Finance. - 81 - Table 18: Effect of Non-Trade Policies on Bias for 1973 A. Changes in tm ¢ percent points) -15.8 (i) Due to excise taxation -13.0 (petroleum products) (-5.6) (cigarettes) (-3.6) (sugar) (-3.8) (ii) Due to Agricultural Pricing (wheat) -2.8 B. Changes in sx a percent points) -9.5 Due to Agricultural Pricing 9.5 (cotton) (-7.8) (gum arabic) (-0.3) (groundnuts) (-0.6) (sesame) (-0.8) C. Recomputed Bias tm (adjusted) 0.382 sx (adjusted) - -0.157 B = l+sx l+tm 0.610 Degree = (B-1) 100 - -39.0% Compare unadjusted degree of bias:- 36.5% Sources: See text. - 82 - products, we assume a full offset of the import substitution incentives implicit in the import taxes, when we record the associated change in tm in Table 18. 119. The cumulative effect of domestic excise taxation of these three key commodities leads to an adjustment of the estimate of tm for 1973 from 54 percent (inclusive of the 15 percent exchange tax) downwards by 13 per- centage points to 41 percent. Agricultural Producer Pricing 120. We have already seen (Section IV) how government policies with respect to producer prices and marketing of key cash crops impose a heavy tax on agricultural production. Here we examine whether such implicit taxa- tion biases incentives for import substitution or exports. 121. Of the five crops we consider, only wheat can be regarded as an import-substitution commodity in 1972-74. In the 1972/73 crop year there was an implicit tax on domestic wheat of 31 percent relative to the import parity equivalent (Table 11). In 1973/74 this had increased to 40 percent. We take 36 percent as the mean. This rate of implicit taxation on domestic production, can, in certain respects, be viewed as equivalent to a wheat import subsidy at the same rate. On that basis we can make another downward adjustment of the tm rate estimated for 1973. In addition we have to make a downward adjustment for the average rate of import duties collected on wheat and the exchange tax on it, elements which presently boost the unadjusted estimate of tm. The net result can be treated as a 57 percent import sub- sidy on wheat which, when accounted for, entails another 2.8 percentage point downward adjustment of the estimate of tm for 1973. 122. We now turn to the implicit taxation of export crops. Whereas the non-trade measures discussed so far have led to downward revisions of - 83 - our trade-policy-based estimate of t , reducing the degree of anti-export bias, the implicit taxation of exportables will work in the opposite direc- tion, but through reduction of the estimate of sx. 123. Cotton, as discussed earlier, is a very special case, because of the intricacies of the "joint account" system prevailing in the agricultural parastatals where it is almost exclusively grown. A very crude (and known-to be on the low side) guess at implicit taxation of cotton with respect to the export parity is obtained by taking the "proprietory receipts" from agricul- tural schemes as a percentage of cotton exports. The average for fiscal 1972/73 and 1973/74 is 13.9 percent. 1/ Using the 1973 cotton export value as a base this rate of taxation amounts to a reduction of sx by 7.8 percentage points (Table 18). 124. For gum arabic, other than export taxes and royalties which already have been considered, other taxes and marketing corporation profits (a form of implicit taxation) average at 5.9 percent for 1972/73 and 1973/74. For 19.73, this rate of additional taxation amounts to a downward revision of sx by only 0.3 percent. 125. Our information on the groundnuts pricing structure attributes a cost equal to 50 percent of f.o.b. value (this is an average for 1972/73 and 1973/74 to "port charges, commissions, weighing, transport etc.". It is hard to believe that such a massive margin does not contain some elements of 1/ 1972/73 1973/74 Cotton exports f.o.b. (E million) 67.6 71.8 Proprietory Receipts of Agricultural Schemes (L million) 11.0 8.2 Implicit tax rate (%) 16.3 11.4 Average implicit tax rate = 13.9% Sources: Bank of Sudan Quarterly Bulletins and Ministry of Finance. - 84 - implicit taxation. If, however, we do consider it as reflecting true eco- nomic costs, then the only source of taxation in addition to the export taxes/ subsidies already considered is the local tax, ushur, which averaged at 6.3 percent of f.o.b. value for the last two crop years. This contributes a revision of s for 1973 of -0.6 percentage points. 126. For sesame, too, the only source of additional taxation in crop years 1973-74 was ushur, which amounted to 10.7 percent of f.o.b. price. This meant a downward revision of s in 1973 by 0.8 percentage points. Recomputation of Bias for 1973 127. Taken together, additional sources of implicit and explicit taxation on these four export crops cumulate to a reduction of s for 1973 by 9.5 per- centage points. And, for reasons cited above, we know this reduction to be an underestimate. To be set against this is our estimated reduction of t by 15.8 percentage points (see Table 18), attributed chiefly to domestic excise taxation on sugar, petroleum and cigarettes, and partially to the implicit taxation of domestic wheat production. Using these adjusted estimates of t and sX, we recompute the bias in the incentive regime as between exports and import substitution. Table 18 records our revised bias index of B for 1973 at 0.61, implying a 39 percent anti-export bias. This is slightly higher than the anti-export bias of 36.5 percent recorded from the trade/payments regime alone. The lesson to be drawn from this exercise seems clear: the non-trade interventions considered do have a significant influence on the incentives for trade, but because they work in opposite directions to roughly equal degree, their inclusion in the analysis does little to alter the massive anti-export bias implicit in the trade/payments regime. - 85 - D. Qualifications 128. The above diagnosis of bias in the incentive regime against exports is subject to some qualifications. 129. First, the quantitative elements of the discussion have been limited, almost exclusively, to the "price variables." The effects of import and export licensing have been neglected; their inclusion would accentuate the degree of anti-export bias diagnosed. The premia associated with import QRs have already been discussed. In addition, interventions through QRs tend to increase the uncertainty and variance surrounding the trade regime, which takes an addi- tional toll. on efficient resource allocation. To take examples from the export side, the sporadic recourse to export bans (within the framework of private export licensing) raises the effective tax on exports beyond that captured by explicit duties, subsidies and surcharges. Table 19 records the frequency of export bans in 1974 on some privately exported items in which Sudan is believed to have good, long-term export prospects. 130. Second, but on the other side, we must recognize the possibility that some Sudanese exports face price-inelastic demand, a situation which would justify optimum export taxes. If that is the case it is then illegi- timate to count these export duties as part of the total package of taxes which discourage exports. So to the extent our estimates of anti-export bias include such optimum duties, these are overestimates. 131. Third, we must note that some import duties are collected on items which, given Sudan's resource base, are unlikely to be produced domestically for a long time to come. Consequently, the tariffs should be regarded essen- tially as revenue instruments, whose allocative effects are in practice (if - 86 - Table 19 Frequency of Export Bans, 1974 Commodity 1974 Banned Ban Lifted February 4 Maize, durra, edible oils, oilcakes & expellers March 11 Groundnut oil & oilcakes in Port Sudan June 25 Sesame oil and expellers; all groundnut oil and expellers; cotton- seed expellers in Port Sudan October 31 Cottonseed expeller, durra, karkadeh if sold for convertible currencies November 5 Livestock and meat (except quantities in Port Sudan) November 18 Livestock and meat, if sold for convertible currencies December 15 Livestock and meat 1975 February Durra (Sorghum) - 87 - not theoretically) small. Hence the inclusion of these import taxes in the aggregate measures of bias overstates the bias in favor of import substitution and against exports. 132. Fourth, for some products, notably those in industry, the existing incentives tor import substitution are moderated by the system of project licensing and ex-factory price control (recall Section III). These policies prevent the existing bias from having its full distorting effects on resource allocation. But this last point raises the fundamental question: why retain an incentive system whose resource allocation signals have to be constantly monitored, controlled and often counteracted? This question is considered in the next sub-section. 133. But before doing that we offer an overall assessment of the above four qualifications. The first points to underestimation of anti-export bias, while the other three suggest overestimation. Taken together, they probably indicate that we have overestimated anti-export bias in the incen- tive regime. BuL, given the massive degrees of anti-export bias shown by our numbers, even large allowances for overestimation will not vitiate the central diagnosis: the incentive regime for foreign trade in Sudan is heavily biased against exports, even though the long-term development potential of the economy is almost certainly tied to their rapid growth. E. Revenue Considerations 134. The single most important consideration behind this anti-export incentive regime is the need to raise government revenue. Historically, for- eign trade has been easy to tax, especially in a huge country where communi- cations have been poor, qualified accountants scarce, and where neither - 88 - tradition nor legislation has provided encouragement for careful accounting. To this day, Sudan retains its legacy of a revenue system based on indirect taxes, and in which commodity taxes on foreign trade occupy a special posi- tion. Only in the past decade, with the growth of domestic manufacturing, have the protective effects of the tariff structure been recognized and appre- ciated; even now much of the deliberate protection offered to local firms is done through import quotas and bans, rather than tariffs, whose primary tar- get continues to be revenue. 135. Whatever the explicit objective of the trade tax structure, the distortionary resource allocation incentives exist, and their signalling power is likely to exert increasing influence as the economy develops and matures. The need to initiate reform is clear and present. But we recognize that this will be a slow process; recommendations to reduce or eliminate import tariffs and export duties quickly are, by themselves, too facile and unrealistic. The trade tax regime can only be rationalized in conjunction with a con- certed effort at tax reform, which seeks to replace the existing, allocation- distorting revenue instruments with a tax structure that is more allocation- neutral. Without deliberate efforts at reform, we have reasons to fear that pressures to raise revenue will lead to grasping of easily administered com- modity tax handles, with little appreciation of their resource-allocation effects. The pressures to increase the effective collection of ushur (local tax) from tradeable crops are an obvious example. In Section VIII we outline elements of a more trade-neutral tax structure. - 89 - F. Is the Exchange-Rate Overvalued? 136. Discussions of trade policy frequently dwell on this question. We have already covered many of the substantive points which would normally be addressed in such an analysis. And certainly in one obvious sense the Sudanese pound is overvalued: open current account deficits would increase dramatically if the current panoply of trade taxes, QRs and exchange controls were dis- mantled. 1/ But instead of the sub-title above, we prefer to pose the ques- tion as: What are the possible benefits for Sudanese trade policy of an effective and uniform devaluation? 2/ Posed in this way, there is less danger of viewing-devaluation as a panacea for trade policy. 137. The principal possible benefits from an effective devaluation in Sudan, considered by itself, are: (a) if the present structure of trade taxes is to be retained, or only slowly reformed, devaluation is the most fiscally cheap method for increasing the inducements for export; (b) the nominal base of the existing trade taxes will increase, thus increasing government revenue (expenditures would also increase, but less); 1/ This would be true even if strict capital account exchange controls were retained. 2/ We choose this wording to indicate, on the one hand, the possibilities for effective (but not de lure) devaluation through increasing the Exchange Tax/Subsidy percentage, and on the other, to point out that the last such effective devaluation was not uniform. - 90 - (c) since devaluation would lead to a higher landed cost (tariff-inclusive), in pounds, for imports, this would imply a reduction in the QR-induced premia (the Pm), which currently accrue to traders and other QR allo- cation beneficiaries. In effect, there would be more price rationing of imports, with the government col- lecting a larger share of the rent element above c.i.f. cost. 138. But what devaluation would not accomplish is a significant reduc- tion in the anti-export bias of the present incentive regime (some reduc- tion might occur through the "mopping up" of some of the QR-induced premia). This is an obvious corollary of the fact that devaluation entails a uniform import tariff and a uniform export subsidy. Thus a key problem diagnosed here would remain. Devaluation, though helpful in several respects, is no substitute for fiscal reform. The need for a joint policy package is dis- cussed further in Section VIII. - 91 - VII. Experience with-Direct Controls 139. The different kinds of government policy intervention that we have discussed can be usefully subdivided into two groups: - those interventions which, in some sense, work "through the market", such as taxes, subsidies, and exchange rate changes; and - those direct controls on quantities and prices which, in a sense, work by prohibiting certain kinds of market trans- actions. 1/ Economic theory tends to favor the first kind of intervention and frown upon the second. Here we try to pull together from our earlier discussions our perception of the Sudanese experience with direct controls. The main types of direct controls we consider are: (a) foreign trade licensing/foreign exchange allocation; (b) industrial licensing; and (c) domestic price control policies. We discuss each briefly. A. Foreign Trade Licensin& 140. The system of import licensing and exchange control has certainly achieved its primary objective of controlling aggregate foreign exchange expenditure and keeping reserve loss below what would otherwise have occurred. Furthermore, from the viewpoint of authorities, aggregate foreign exchange 1/ Both sets of actions alter the terms of exchange in the markets in which they are applied (hence our inclusion of both under the rubric of "incen- tive policies"). - 92 - expenditure has been controlled with greater certainty than is likely to have been possible in a freer system. 141. But the costs of the system have been high: (a) The QR-induced premia above landed cost have aggravated the anti- export bias implicit in the structure of foreign trade taxes (Section VI). (b) The QR-system has been characterized by considerable uncertainty: foreign exchange is sometimes simply not available for normally approved purchases. This has hindered domestic capacity utili- zation and induced holding of large inventories. (c) Because of the allocation procedure the same product has often been associated with different implicit premia, depending on the final recipient and the method of allocation. So the system has not been characterized by "horizontal equity." (d) Import licenses are rarely allocated among units according to eco- nomic criteria; for example, successful domestic manufacturing ven- tures may go short, while losing enterprises obtain allocations (Section III). Furthermore, the allocation system for domestic manufacturing has encouraged the creation of excess capacity (Section III). (e) Protection of domestic manufacturing by bans or quotas on competing imports has encouraged the production of low quality domestic sub- stitutes. Quality is not readily subject to policing by ex-factory price controls. (f) The system has generated high profits for commerce, a sector which scarcely needs further profit inducements. - 93 - All of these adverse consequences would be alleviated to some degree if there were more price rationing of foreign exchange (see Section VIII below). 142. Export licensing has been characterized by far fewer quantitative restrictions. But over 1974 export bans were frequently used on oilcakes, livestock products and dura to improve domestic supply (Section VI). It is possible that these interventions were peculiar to the recent period of turbulent international commodity markets, but, if they become a permanent feature of the scene, there is cause for alarm. These sporadic interventions reduce the profit horizon of potential exporters and are a significant non- price discouragement to exports. B. Industrial Licensing 143. Given the heavy protection of domestic industry explicit and impli- cit in the foreign trade regime, the efforts at industrial licensing have been neccessary and, Dn the whole, beneficial. But rigidities in the system have hampered the exploitation of domestic capacity. And, particularly in the earlier years, the lack of selectivity in project criteria permitted approval of plants producing high-cost, intermediate-import-based import substitutes. The effective protection granted to different approved industries has been widely divergent, and with no apparent basis in deliberate policy. If the pace of industrialization quickens, the opportunities for error in resource allocation will multiply. It will become more urgent to institute better project selection procedures or to move to a less haphazard protection system (Section VIII below). - 94 - C. Domestic Price Control Policies 144. Our overall impression is that the Government has been moderately successful in fixing two kinds of prices: prices at the factory level (ex- factory prices for industrial products and into-mill prices for some agri- cultural products) and the retail prices of commodities over whose supply the Government exercises direct control (through import monopolies, namely sugar and wheat flour. For the other products and distribution stages, price control exists largely in name. 145. Let us first consider the implications of successful price control. As we saw in Section III, the main benefit of ex-factory control was that it usually reduced the degree to which domestic firms could exploit the pro- tection implicit in the trade and fiscal systems. But this degree was not uniform. Much of the initiative (and hence the de facto protection enjoyed) lay with the costing procedures of the firms. So the system certainly did not reduce the multiplicity of effective protection within the industrial sector. 146. The other example of relative success, the retail price controls on sugar and wheat, certainly achieve the government's proximate goals in each case: the levying of a consumption tax in the case of sugar (in all normal years) 1/ and a consumption subsidy in the case of wheat. But the proximate goals are achieved at the cost of implicit production taxes on domestic wheat and sugarcane (Section IV). Such production taxation will have to be reduced if Sudan is to fulfill her plans to become a significant 1/ In 1974 the government's fixed price policy on sugar required a con- sumption subsidy as world prices boomed. - 95 - exporter of both commodities. If the proximate objectives are to be retained, then the government may have to consider operating a two-tier price system for both products: a fixed producer price for domestic procurement and a world market-determined price for exports. Such a two-tier system has operated for some years for cottonseed. 147. Where government price contol is weak, which is true for most pro- ducts at wholesale and retail stages, the commerce sector is the beneficiary (Section V). And here we would argue that the government's panoply of price control measures may have an adverse consequence, not simply because it fails, but because by fostering an illusion of control it distracts attention from the rich premia being earned in trade. This, in turn, means that policy- makers underestimate the inequity and resource misallocation costs associated with the heavily QR-protected economy. It might be better to abolish the pretense at price and profit margin control over wide areas where, in effect, it does not exist. 148. The analytical basis for the general profit margin controls is, in any case, weak. The rules are based on some notion of a "fair profit". But such a notion subverts the role of profits as an allocative guide. And as for equity, a revamped direct tax mechanism would generally accomplish better re- sults than the present weakly applied price control measures. 149. Finally, we must draw attention to a common feature of all these direct controls, discussed above. They require detailed and continuous inter- vention. To be successful, such detailed management of an economy requires, at a minimum, a well elaborated plan, a pervasive and rapid information- monitoring system and a coordinated decision-making process. None of these - 96 - conditions is met to any significant degree by the present administrative structure in Sudan. It therefore makes sense to seek policy modes which require less detailed administrative action and to shift more of the eco- nomic coordination burden to market processes. Most of our suggestions for policy reform (Section VIII) take account of this view. - 97 - VIII. An Agenda for Policy Reform A. Incentive Policies and Development Strategy 150. Our suggestions for policy reform follow from the diagnoses, con- ducted in the previous sections, of the adverse implications of the present policy regime. Like the diagnoses, our suggestions are limited to the domain of incentive policies. We fully recognize that much of the growth in the Sudanese economy in the next decade will follow from the heavy, foreign- financed investments anticipated in the productive sectors. Certainly, policies are no substitute for projects. But the structure of policy can enhance or reduce project benefits and the larger the anticipated investment program the greater the potential losses from wrong policies. 151. Our view on the part to be played by incentive policies is also conditioned by our notions about the appropriate development strategy. In very broad terms, "agricultural exports" sums up this strategy. Given Sudan's underexploited resources of arable land, livestock and water, and the rela- tively small size of the domestic market, it would be difficult to disagree with this conventional wisdom. In somewhat less general terms we see the strategy as composed of the following elements: (a) Development of the "modern agricultural sector", composed of irri- gated and mechanized rain-fed modes, through foreign and domestic private resources. This would be the productive lynchpin of the economy; (b) The development of public expenditure policy to raise producti- vity in traditional agriculture. This would be the main arm of equity policy in Sudan; - 98 - (c) Selective, and limited, industrialization based on agro-processing, with a view to gradually developing export capability; (d) The use of foreign and domestic public investment to expand the infrastructure to facilitate the above elements of the development strategy. We anchor our suggestions for policy reforms to this sketch of development strategy. Clearly, the structure of incentives should be designed to sti- mulate the modern agricultural sector, to encourage traditional farmers to enjoy returns fro& the cash economy while complementary public expenditure raises their productivity, and to prevent the expansion of the industrial sector from extracting a heavy tax on agriculture. Basically, the role of incentive policies should be to assist exploitation of comparative advan- tage, while public expenditure policy (and to a more limited degree, taxation) focuses on equity objectives. B. The Policy Package: An Outline 152. With such a development strategy in mind we draw upon our earlier analytical appraisal of policies to outline the proximate goals that policy reforms should aim at. The reforms should: (a) Reduce the intersectoral resource allocation bias against agricul- ture, which is implicit in the present structure of policy (Section V); (b) Reduce the heavy anti-export bias diagnosed in Section VI: (c) Reduce the multiplicity of effective protection rates within the industrial sector (Section III); - 99 - (d) Increase the flexibility of resource allocation within alternative agricultural activities to take better advantage of changing international trade opportunities -(Section IV); (e) Reduce the burden of detailed economic management currently borne by the administrative structure (Section VII); and (f) Reduce the profitability of the commerce sector (Section V). 154. To implement these goals we outline the following medium-term program of policy reforms: 1. Foreign Trade/Payments Policies (a) Reduce reliance on export duties; (b) Increase the rate of Exchange Tax/Subsidy from 15 to 30-35 percent, to apply uniformly to all transactions; (c) Exempt exports from Develpoment Tax (or any other sim- ilar flat sales tax) 1/; (d) Integrate import duty structure with domestic excise system (see (2a) and the discussion in the next sub- section); (e) Reduce recourse to export bans. 2. Domestic Fiscal Policies (a) Integrate domestic excise structure with import duty structure (see (Id) and below); (b) Develop income taxation for the modern agricultural sector; and 1/ The present policy of exempting industrial exports from domestic excises should be retained. - 100 - (c) Move from commodity-based taxes like ushur to land taxation for local revenues. (3) Intra-Sector Policies: Industry (a) Much less use of QRs for protective purposes. If protection is deemed necessary, it should be through the tariff system and at a uniform rate for all products; (b) Introduce more rigorous project criteria for indust- rial licensing; (c) Much more selectivity in granting fiscal concessions, especially import duty exemptions on raw materials; and (d) More recourse to economic criteria in allocating foreign exchange. (4) Intra-Sector Policies: Agriculture (a) Institute a new Price Unit which would coordinate all analysis and advice on domestic agricultural output price policies, and pay much more attention to international relative price norms; and (b) Require agricultural parastatals to be flexible in determining annual cropping patterns. C. The Policy Package: A Discussion 154. We should make two general points before proceeding to a brief dis- cussion of particulars. First, though ideally the package should be seen as a whole, we believe that instituting individual elements will also move in the - 101 - direction of a more rational incentive framework. Second, we have abjured all discussions of timing and phasing at this stage. Our proposals relate to the medium and long run. Their implementation will obviously have to take account of short run exigencies. In general, the sooner these proposals are imple- mented the sooner an improved structure of incentives will be achieved. Foreign Trade/Payments Policies 155. Items (la), (1c) and (le) are designed to accomplish two things at the same time: first, they would reduce the anti-export bias in the present trade regime, and second, since virtually all exports are agricultural prod- ucts, this would simultaneously reduce the effective taxation of the agricul- tural sector. The recommended increase in the Exchange Tax/Subsidy rate would amount to a de facto devaluation of 15-20 percent. We have already reviewed the benefits of such action in Section VI. Basically, the policy would have two beneficial effects: it would increase the incentive for exports (and remittances), and increase the degree of price rationing of foreign exchange amongst domestic uses. The latter will mean lower QR-induced premia which, in turn, will mean a lower degree of anti-export bias, lower profits for domestic trade and reduced costs associated with the multiplicity and var- iance of signals in a QR regime. Tariffs, Excise Taxation and Protection 156. We consider recommendations (ld), (2a) and (3a) together. We analyzed in earlier sections how the existing import duties are important ingredients of the bias against exports and against agriculture. But, given their crucial revenue function, we noted (Section VI) that recommendations to reduce tariffs are, by themselves, facile and impractical. What is needed is a revenue structure which is more neutral both with regard to exports vs. - 102 - import substitution and with respect to agriculture vs. industry. To this end we propose gradual integration of the domestic excise structure with the import duty structure. As we noted in Sections III and IV, the effect of a domestic excise at a comparable rate to the import duty on a final product is to offset the protection offered by the import duty. Thus, even though the import duty structure is left unchanged, the creation of a parallel domestic excise rate structure on final commodities offsets the distorting protection effects. 1/ 157. If it is believed that domestic production for the home market should receive some protection, this can be introduced quite simply. If T is the rate of import duty on the final product under consideration, the domestic excise can be set at (T-X), where X is the element of protection desired. We do recommend that protection, if it must be given, be granted in this manner through the tariff/tax system, and not by QRs. Further we recommend that X be set equal for all products, so that the degree of pro- tection is uniform (we also recommend that X be kept low, no higher than 20 percent). And since we are interested in equal effective protection, X can also be the common rate of import duty on intermediate goods. 2/ 1/ We do not mean to imply that there is no scope for rationalizing the import duty structure. But we do feel that any such rationalization must be subject to two constraints: - the rationalization must not lead to sharp reductions in overall import duty revenue; and - tax rates under the new structure must be sufficiently flexible to permit heavy taxation of consumer luxuries and low rates on basic consumer goods and intermediate items. 2/ Our proposals here offer a broad approach; implementation will require more detailed analysis. - 103 - 158. The desirable characteristics of our proposal to integrate the domestic excise and import duty structures 1/- are: (a) the bias-in favor of import substitution (and against exports) will be sharply reduced; (b) since the present structure of tariffs accords heavy protection to manufacturing activities and little to agriculture, neutralization of the tariff protection by excise taxation will cut down the bias in-incentives in favor of manufacturing and against agriculture; (c) all this will be achieved without sacrificing the reve- nue function of import duties; (d) the above neutralization of protective signals will reduce the onus on the industrial licensing system to weed out the "wrong" projects; (e) the emphasis on protection through tariffs, rather than QRs, will mitigate the poor-quality-encouraging aspects of the latter method; and (f) though the element of protection conferred can be uniform across commodities, our proposal permits differentiation of the import and excise duty structure across commodi- ties to aid equity goals. 1/ It may be objected that for many commodities the domestic excise will be redundant, since these products are not produced in Sudan. This argument doesn't go far. After all, the whole purpose of the proposal is to reduce incentives to produce items in which Sudan does not have a cost advantage. It is far better to reform the incentive structure before a whole-new generation of high-cost, import-substituting indus- tries have grown up behind the protective barrier. - 104 - Other Domestic Fiscal Policies 159. (2b) is aimed at replacing the revenues that will be lost if our recommendation for abolishing export duties and other charges on exports are accepted. Clearly, if modern agriculture is to form the basis for future growth, means will have to be devised for appropriating some of the incomes generated in this sector for public purposes. We recognize this. Our con- cern is to ensure that the taxation method does not distort resource alloca- tion, in the way export duties clearly do. Nor do we believe income taxation of the modern agriculture sector to be insuperably difficult. In rainfed mechanized agriculture only a few thousand farms will be involved. And the number of irrigated tenancies subject to tax may not be large with a rea- sonable exemption limit. Other Intra-Sector Policies 160. The need for reforms (3a), (3b) and (3c) for industry is self-evi- dent. The case for proposals (4a) and (4b) for Agriculture has been argued earlier in the paper. With regard to them we would like to emphasize that one of the major advantages of crop activities is that factor allocation decisions are quickly reversible, unlike the "non-shiftable capital stock" problems associated with industrial activities. This technological flexi- bility emphasizes both the scope and the need for exploiting short-term com- parative advantage. 161. We believe that, if the reforms suggested above are implemented, the new structure of incentives will substantially improve the efficiency of resource allocation in Sudan and will facilitate the kind of agricultural- export-based development strategy that we discussed earlier. Table I - mports and .-rort Taxes l/ (E Sudanese thousands) 1970 1971 1972 1973 1974 (Jan-Sent) Imports Taxes Imports Taxes Imports raxes Imports Taxes Lnports Taxes (L) (2) (1) (2) (1) (-) (1) (2) (!) t2) 1. Selected Foodst-.ffs 17398 71q4 20364 7464 23294 8302 32782 9433 27426 10930 (a) Wheat 4601 664 4730 853 4925 1235 8304 522 3998 260 (b7 Sugar 5143 1843 9247 3344 9684 3506 18299 6322 15721 8411 (c) Tea 4955 2459 4004 1779 6138 1984 3307 1673 4571 1330 (d) Coffee 1907 1939 1635 1232. 1869 1341 2004 725 2505 730 (e) Dairy Products 792 289 748 251 678 236 868 191 631 199 2. Cig3rettes 1111 6724 1290 8181 1 73 13729 1527 9770 1302 8731 3. Medical & Pharmaceutical Products 3387 653 2760 480 4602 724 5161 488 3729 321 4. Fertilizers "Kanufactured" 1658 391 1937 452 2496 523 3775 471 3232 381 5. Petroleum Products (Lncl. crude) 9025 7610 8918 7751 8770 7977 9913 9334 8725 14025 6. Insecticides 2520 426 3709 613 2900 270 3272 201 3060 239 1 7. Rubber Ma:ufactures 186 90 301 100 280 180 472 146 S11 257 L,n 8. Wood and Cork Manufactures 109 47 267 135 306 137 382 158 108 25 1 9. Iron and Steel 4612 1857 4794 1979 3814 1355 7885 2433 6869 2153 10. Metals Manufactures 3708 1017 3639 1054 3578 151S 465S 1590 3903 !144 11. Jutes 2nd Sacks 3612 920 4067 1137 494; 1252 5563 1039 6441 1232 12. Machinery, Electric 4099 2456 3788 2169 3032 1085 4191 2148 5715 2513 13. Machinery, Non-Electric 11644 2473 10313 3403 14063 3617 17392 3991 17000 3473 (a) Agricultural Machinery 2/ 3135 1253 304 2i31 5 50 17 174 11b6 14- (b) other Non-Elec. Machinery 3/ 6047 1207 7887 2735 9423 2319 13425 3250 12422 2576 (c) Machinery Spare Parts 4/ 2462 633 1175 364 1909 74S 2520 567 3392 753 14. Road Passenger Cars 772 517 311 352 1094 828 2048 1644 640 782 15. Lorries 1019 675 603 373 2236 1828 2171 999 1396 478 16. Tires and Tubes 1199 791 1852 1943 1513 906 1947 849 2412 923 17. Auto-Spare Parts 5/ 4359 1702 3856 1755 4273 1522 6632 2027 5989 1716 18. Textiles 10507 6475 22395 10190 17318 6964 13314 4992 11879 4901 19. All Other Imports 27413 14058 28497 15144 22487 7278 43853 13371 40440 9858 Total 108338 56076 123661 64675 123077 59985 166948 65084 151077 64112 1/ Includes import surcharges, constasnption duties on imports, development taxcs, but not 157. exchange tax. t 2/ All agric. tractors, harvesters (not pumpi) 3/ Includes agricultural pumps and spares for pumps. 4/ Includes spare parts of non-agric. tractors 5/ Includes spare parts of agricultural tractors Source: Department of Statistics. Table 2 : Exports and Export Taxes 1/ (F. Sudanese thousards) 197n 1971 1972 1973 1974 (Jan-Seot) Commodity Exports Taxes Exports Taxes Exports Taxes Exports Taxes Exports Taxes (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) F' 1. Cotton 65051 5043 69402 6370 74336 6622 80083 6245 45668 3C^S a% (a) Sakel 56233 43S0 62334 5763 63'j4 5962 6?426 5601 34166 3200 (b) A.-ericzn rain-grown 1389 52 160 5 1573 45 1702 56 502 22 (c) American irrigated 7099 587 6477 581 8536 593 8746 578 10990 683 (d) Scarter 328 21 377 19 472 21 207 10 10 1 (e) Waste 2 3 54 2 1 1 - - 2. Cottonseed 1729 52 1422 54 630 25 611 14 242 18 3. Sesame 6722 222 7996 343 8756 348 10S78 434 14665 857 4. Groundnuts 5466 102 9327 203 9211 190 13053 271 16352 970 5. Gum Arabic 8961 1873 8425 1724 9131 1794 7844 1414 11355 996 6. Oilcake and Meal 5087 186 4194 209 5278 241 6778 235 2235 111 7. Dura 60 - 1136 4 1691 34 3054 80 3495 102 8. Meat n.a. n.a. 112 20 1247 1 4472 38 3364 164 9. Hides and Skins 1590 ( 1806 ( 3197 ( 5440 ( 4060 ( 61 (170 (199 (219 (764 10. All Other 6943 ( 10633 ( 10993 ( 11329 ( 11510 ( Total 101609 7539 114453 9097 124470 9425 143542 8950 112946 7888 > 1/ includes all export duties, royalties and surcharges like (as of June 1974) the Development Tax. m Source: Department of Statistics la m Table 3: Ex-Factory and import (c.i.f.) Prices of Selected Conmodities. 1971 Irrort Price Ex-Factory Price Import SITC Ex-Factory Value Price Commodity Code Unit Price Comnodity Comment BTN Code Unit Quantity (b '000) (c.i.f.l Canned Tomato Paste 3113 tin/95 gs. 0.033 Tomato puree & paste 055-5210 kilo 1304945 137135 0.10; Cotton Seed Oil 3115 mn. ton 122.500 Vegetablc oils 421-422 kilo 1031821 161225 0.15$ Sugar 3118 m. ton 52.500 Beet cane refined 061-2000 n.t. 199469 9246679 46.357 Beer 1/ 3113 doz. bottles 1.214 Beer bottled or canned 122-3020 litre 72927 3688 0.119 Cotton Grey Cloth 3211 yard 0.094 Grey unbleached wholly 652-1020 yard 1197278 73617 O.C62 of cotton Cotton white Cloth 3211 yard 0.088 Voile & other 652-2900 yard 36607592 2840739 0.078 652-2909 Knitted Cotton Underwear 3213 dozen 1.700 Undergarnents of cotton knitted 841-4300/10 dozen 5987 10008 1.672 or crocheted Tanned Cow Eide 3231 sq. metre 1.700 Calf skin & kip vegetable - 611-3010 kilo 14851 18134 1.2"1 0 tanned and other 611-303C Insecticides 3512 275 gm. 0.200 Insecticides 599-2010 kilo 10452000 3708616 0.355 Paints 3521 gallon 1.520 Other prepared paints, varnishes, 533-3230 kilo 275577 68695 0.249 enamels & dyes Laundry Soap 3523 m. ton 157.000 Commnon soap 554-1010 kilo 29653 2252 0.076 Ioilet Soap 3523 m. ton 479.000 Toilet soap 554-1090 kilo 4303 3007 0.699 Ccment 3692 M. ton 10.200 Cement 661-2000 a. ton 3872 69884 18:049 Refrigerators 3829 10 cu. ft. 95.000 RefrLgerators 725-0110 unit 252 13468 53.444 1/ Each bottle contains I1 hectoliterof beer; excludes excise duty of 1.896/dozen; and includes LO.420 of deposit for bottle. 150 Sources: (I) Ex-factory prices from Ministry of Industry (2) Import price data from Foreign Trade Yearbook M - 108 - Appendix Table 4: Domestic Price Indices Cost of Living (January 1970 = 100) High Salary Low Salary Wholesale ( L500/year) ( L500/year) (1953 = 100) 1970 105.5 106.7 121.3 1971 106.8 108.2 117.0 1972 115.5 120.9 127.7 1973 133.7 141.6 148.5 1974-1/ 163.7 175.9 n.a. 1/ For January-October only. Sources: Statistical Yearbook, 1973, and Department of Statistics. - 109 - Appendix Table 5: Sorghum Prices Sudan L Per Metric Ton (Feterita Quality) 1971 1. F.O.B. Price Port Sudan-/ 30.30 2. Export Tax 3. Port Charges, Bank Charges, Commissions Loading on Shipl/ 4.05 4. Transport Gedaref-Port Sudan-/ 2.97 5. Auction fee, Silo and Storage fee, 2/ Cleaning and fumigation, sacks, etc.- 5.66 6. Price in Gedaref (line 1 minus lines 2, 3, 4, 5) 17.62 7. Ushur tax (12% of line 6)2/ 2.11 8.. Producer Price Gedaref (line 1 minus lines 2, 3, 4, 5, 7) 15.51 9. Export Parity Price at Gedaref (line 1 minus lines 3, 4, 5) 17.62 10. Producer Price as % of Export Parity Price (line 8 . line 9) 88% Sources: 1/ Foreign Trade Statistics, Department of Statistics, Ministry of Planning. 2/ IBRD estimates. - 110 - Appendix Table 6: Groundnuts Pricing Sudan L Per Metric Ton 1971-72 1972-73 1973-74 1. F.O.B. Price Port Sudan-/ 78.43 87.65 117.76 2. Export Tal 1.5 1.5 5.89 3. Port Charges, Commissions, Weighing, T*ransport, etc. El Obeid to-Port SudanT. 36.29 40.99 36.68 4. Local Tax (12% of line 5)-/ 4.35 4.84 8.06 5. Producer Price in El Obeid-/ 36.29 40.32 67.13 6. Export Parity Price in El Obeid (line 1 minus line 3) 42.14 46.60 81.80 7. Producer Price as % of Export Parity Price (line 5 line 6) 86% 86% 83% Sources: 1/ Foreign Trade Statistics, Department of Statistics, Ministry of Planning. Weighted average of quantity and value to derive price. 2/ Ministry of Finance. 3/ Dr. Osman A. Hakim."The Feasibility of Groundnuts Decortication in the Rahad Scheme". Ministry of Agriculture, Food and Natural Resources, November 1974, Table IX, Page 35. 4/ Difference between line 1 and line 5 minus line 3 + 5. RECENT PAPERS IN THIS SERIES No. TITLE OF PAPER AUTHOR 336 Labor Force, Employment and Labor Markets L. Squire in the Course of Economic Development 337 The Population of Thailand: Its Growth S. Cochrane and Welfare 338 Capital Market Imperfections and V.V. 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