In light of the proposed changes in the Mauritian economy, there is literature that lends itself to the necessity of a quantitative assessment of these policy changes. Since the changes are economy-wide, it is necessary to discuss the benefits of using a
computable general equilibrium model to capture these reforms. First, the computable general equilibrium literature presents that the effects of a fall in export price have an ambiguous effect on national welfare. Second, computable general equilibrium studies support the ambiguity of the effects of tariff liberalization. Thus, the relevance of the Mauritian study as born by the current literature will be addressed here.
1.3.1 The Ambiguity of Export Price Liberalization Effects on Welfare
The ambiguity of export price liberalization on economies as a whole can be shown through several studies. Some studies present how export price liberalization can
cause little effect on an economy while others show it could have a large detrimental effect on the economy analyzed. Nielsen (2003) shows how those currently involved in preferential trade agreements can be hurt by the loss of preferences. Simulating a removal of preferential treatment for rice exports to the European Union (removal of tariff-rate quotas and tariff rebate agreements), severe trade diversion occurs in India and Pakistan (a decrease in the exports of paddy rice by 41.5% and 25.0% respectively), both of which enjoy preferential access to the EU through substantially lower applied tariff rates than the normal rate and in the absence of quantitative restrictions in the form of tariff-rate quotas. The contraction of exports of processed rice in India of 2.5% is severe enough such that it decreases production of processed rice by the same amount.81 Since Mauritius is such a large beneficiary of the Sugar Protocol and the Special Preferential Sugar agreement, the erosion of sugar preferential export market in Mauritius could have sizable adverse effects on the Mauritian economy.82
Another instance in which export price decreases hurt an economy is given through Siriwardana (1995). In the study of Australia, one of the key external factors attributed to the recession in the 1930’s is a fall in export prices and the subsequent contraction in export revenues for major export commodities (wheat and wool).
Siriwardana (1995) finds that real income falls by 8.9%, real GDP decreases by 5.2%, and the terms of trade falls by 19.6%. The aggregate imports and exports decline sharply (28.2% and 22.9%, respectively). Also, the fall in export prices of the two key
commodities in the economy caused a contraction in output across all sectors in the
81 Nielsen, 2003, pp. 21, 23.
82 The United States is not discussed here because of the direct reference to another preferential pricing agreement in the EU specifically.
economy. And, the aggregated export volumes contracted as well, with the largest amount being in the agricultural sector (14.6%).83 Thus, the change in commodity prices can have a staggering, contractionary effect on an economy as a whole. If Mauritius’
sugar sector has strong forward and backward linkages in the economy, removing the preferential price could have stifling economic effects as well.
On the other side of the coin, commodity price liberalization, may only largely affect the sector it involves directly, while only slightly changing the rest of the economy.
Taylor, Yúnez-Naude, and Hampton (1999) present how maize-price liberalization in Mexico actually leads to sharp decrease in maize output, drives the shadow price of land and labor down only a fraction of the total staple’s price change, while the output of livestock and non-agricultural production increases by 1.8% and 1.1% respectively.84 And, clearly the redistribution of resources to higher marginal value sectors will cause an increase in national welfare. Therefore, the sugar export price adjustment in Mauritius may only have marginal economic waves across an economy or even a positive welfare effects depending on the reallocation of resources the change will create.
In conclusion, there is not any concrete evidence that the sugar sector’s loss of preferential pricing will have a large or small welfare effect or even the effect it will have on other sectors. If resources are highly misallocated, production may increase enough to offset the contraction in the sugar industry, thereby increasing welfare. However, if the sugar sector is a place of comparative advantage, its lack of operation may be a large detriment to Mauritius. Therefore, sugar export price liberalization must be studied further.
83 Siriwardana, 1995, pp. 52-53, 72-73.
84 Please refer to Taylor, Yúnez-Naude, and Hampton, 1999, pp. 453, 463-466.
1.3.2 The Ambiguity of Tariff Liberalization Effects on Welfare
This notion of tariff liberalization’s ambiguous effects on welfare can be further displayed through the CGE models producing both positive and negative welfare effects.
Within the computable general equilibrium context, there are authors that have found positive welfare effects attached to trade liberalization. Ábrego (1999) states that for El Salvador in 1990, the economic policy reformers felt that the economic performance seen in the country from 1989-1999 is due to trade reform. And, the finding of his study shows that welfare and income levels improve with trade liberalization.85 Breuss and Tesche (1994) describe, in their linked computable general equilibrium study of trade liberalization in Austria and Hungary, how trade liberalization (unilateral and bilateral tariff removal) improves the national welfare of both countries.86 Hosoe (2001), in a CGE model for Jordan, shows that a free trade agreement with the European Union will improve Jordan’s welfare by 0.28% (relative size to the base run GDP).87 Hence, trade liberalization can increase welfare in a country.
Some researchers’ results support that tariff liberalization is detrimental to the national welfare of an economy. Harrison, Rutherford, and Tarr (2002) study the effects of Chile joining regional trade agreements additively. In their study, they find that a free trade area with MERCOSUR (Argentina, Brazil, Paraguay and Uruguay), regardless of the elasticities used, causes welfare decreases across each tax replacement scenarios.
And, in the simulation run where Chile decreases its tariffs to zero for the North American Free Trade Agreement members, but did not gain any improved access to the
85 Ábrego, 1999, pp. 72, 77-79.
86 Breuss and Tesche, 1994, pp. 534, 538, 541, 547.
87 Hosoe, 2001, pp. 597, 599.
NAFTA members’ markets (i.e. without reciprocal access to NAFTA markets), the national welfare for Chile decreases for all elasticities and tax replacement scenarios.
This simulation case actually produces the largest decreases in welfare across all tax replacement scenarios than any other case considered in the study.88 Hence, it is established that trade liberalization needn’t increase national welfare, but can actually cause it to contract, especially with unilateral, non-reciprocal liberalization.89
Another example of tariff liberalization causing negative welfare effects can be found in the study performed by Salehezadeh and Henneberry (2002). They report that partial trade liberalization (biased against agriculture) shows no clear indication of economic growth and improvement of income distribution occurs at all. In fact, they find the economy suffers decreased welfare due to the liberalization.90 Thus, if a country only desires to liberalize some, not all of its sectors, it could have a contractionary effect on national welfare. All in all, it is unclear what full tariff liberalization will do to the national welfare of Mauritius and needs further analysis.
To date, this has not been done for the Mauritian economy. There is currently one unpublished paper that presents a CGE for the country of Mauritius, assessing a sugar price shock on the economy. Blake, Milner, Reed, and Westaway (1995) used a two-sector model to show the effects of a price shock for sugar on traded and non-traded sectors in the model. They create a social-accounting matrix for Mauritius in 1987. In the three-sector case they model the rise in the price of all exports. In the three-sector case, the sugar sector expands at the expense of the Export Processing Zone
88 Harrison, Rutherford, and Tarr, 2002, pp. 50, 58.
89 This study does not perform the tariff liberalization with increased access to export regions of destination. However, increased access to other markets can be modeled by an increase in Mauritius’
export prices for goods flowing to a particular region (i.e. a 1% gain in export price).
90 Salehezadeh and Henneberry, 2002, pp. 484-485.
Manufacturing sector while factor prices and non-tradable prices increase.91 However, it does not capture the reforms presented here concurrently. Thus, I will add to the
literature in three ways. First, I will present an 11-sector CGE model for the country of Mauritius for 1997. Second, I will add to the literature by quantifying the effects of the sugar export price decreasing by 59% for the European Union, 45% for the United States, and jointly on the economy. Third, I will also add to the literature by analyzing the various sugar and tariff reforms concurrently to present the most welfare-improving scenarios.
In conclusion, Mauritius may find it profitable to quantify the effects of the removal of the preferential pricing of sugar, unilateral tariff liberalization with the European Union, the Southern African Customs Union, the United States and the Southern African Customs Union, and with all of its trade constituents, with revenue replacement by the value-added tax and a lump-sum tax. In other words, this study can test Mauritius’ trade policy effectiveness in increasing welfare in light of sugar export price liberalization. Quantifying the effects listed above is exactly what this study will do.