Business in Ghana

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Regional Tariff Reform: Necessary, But Not Sufficient

Posted by Business in Ghana on May 4, 2013

Dr. Daniel Bromley, University of Wisconsin-Madison/Humboldt University-Berlin

It is very encouraging to see that the ECOWAS Ministers of Finance have endorsed a regional tariff regime for West Africa. We must be grateful for small steps taken to create vibrant economies in the region. However, small steps often fail to get us where we need to go before something really bad happens to us.

My recent research for the USAID West Africa Trade Hub, embellished by the on-going projects on “highway robbery,” has convinced me that not much will change unless economic problems within individual countries, not among them, are corrected. It is often much easier to arrange regional agreements with others than it is to reform what needs fixing closer to home.

I must stress that the fundamental problem with regional trade in West Africa is the extraordinarily high cost of moving goods – whether or not those goods move across national boundaries. Bribes and enforced delays along trade routes within e.g. Ghana or Mali are as perverse as they are across borders. 

We see that transport costs on these three trade corridors, excluding bribes and delays, mean that moving goods in the region is already twice as expensive as it is in Western Europe. Most of the trucks in the region are castoffs by Western European firms, disposed of because they were too old and costly to keep running.

And then we come to the state of roads and bridges in the region, which is evidenced by average truck speeds over the full routes under study of approximately 30 km per hour— just over half the speed of trucks in Western Europe. This slow speed means that the annual economic return to trucking firms on their invested capital assets is dramatically lower than it could be at higher speeds.  For comparison, imagine airlines needing to hold their planes at the gate for 5 hours each day — lost revenue is serious.

The solution to this problem must come from individual national governments. Buying new, efficient trucks is a cost that could be borne by the private sector, but such investment would do little good as long as these newer trucks were forced to run at 30 km per hour, and the firms had to pay bribes along the highway. Trucking firms would be foolish to make such an investment at present – we can see from the table that bribes and delays at checkpoints would still adde another 15-30 percent to transport costs on these three routes.

It is too easy to suppose that the economic implications of this broken system are confined to a few trucking companies and large exporters and importers. This would be a serious mistake.  Those who are really hurt are cashew farmers, shea producers, onion farmers, handcraft producers — indeed, any struggling entrepreneur in the region. Importantly, as we see from the onion trade from Niger, housewives in Accra are also harmed: these artificially high transport costs are factored into the price of onions in Accra, thus harming both producers and consumers.

The more serious problem is what these unnecessary transportation costs mean for the economic calculations of producers. In very practical terms, when the transport system encompasses costs of this magnitude, it is not just consumers who pay higher prices. Simultaneously, the prices received by producers are profoundly depressed.

Our research calculated the possible price increases for various producers if these unnecessary corruption costs could be eliminated. We found that a 10% reduction in total transport costs—actual costs plus corruption costs along each corridor—could yield price increases of 12-13% for Niger’s onion producers, 2% for Ghana’s cashew producers, and 12% for Mali’s shea producers. To put this in perspective, there is virtually nothing in an economist’s tool kit that could bring about producer price increases of this magnitude; but once can imagine the production incentives that these potential price increases represent for producers.

The lesson here is that corruption and other problems in the transport sector—bad roads and bridges, near-defunct trucks — strip economic surplus out of the agricultural sector operating at considerable distances from the final market.

With economic returns suppressed, the net profitability of these commodities is undermined. Where net returns are suppressed, investment is postponed or forsaken entirely, yields fall, net returns suffer, and farmers are caught in a cycle of falling productivity, reduced critical mass of tradable production, and perhaps even higher costs of arranging shipments. Shea trees become vulnerable to clearance for cotton or other crops; cashew gives way to other enterprises; onion cultivation ceases and the land reverts back to desert.

The essential lesson here is that a dysfunctional transport sector jeopardizes struggling producers throughout rural West Africa. We must not allow the satisfaction of tariff reform blind us to the far more debilitating economic degradation brought on by unnecessary corruption along trade routes. This corruption depresses producer prices, elevates consumer prices, and undermines any incentives that trucking firms might have to invest in more cost-effective vehicles and logistics.

Some people regard corruption as necessary “grease” to keep a particular system running smoothly, but sadly, the corruption studied here is nothing but sand in the gears of commerce. If there is one thing that West Africa does not need, it is more sand.

Dr. Daniel Bromley is the Anderson-Bascom Distinguished Professor of Applied Economics at the University of Wisconsin-Madison and at Humbold University in Berlin. He is the author, most recently, of “Vulnerable People, Vulnerable States: Redefining the Development Challenge. The views expressed here are his own.

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