LCmexL616_es   PDF | 709.3 Kb

UNITED NATIONS
ECONOMIC COMMISSION
FOR LATIN AMERICA
AND THE CARIBBEAN ECLAC
D is tr.
L IM IT E D
L C /M E X /L .6 1 6
28 Ju n e 2004
O R IG IN A L :
E N G L IS H
THE UNITED STATES-CENTRAL AMERICAN FREE TRADE
AGREEMENT: FISCAL IMPLICATIONS FOR THE
CENTRAL AMERICAN COUNTRIES
T h is d o c u m e n t h a s b e e n p re p a re d b y Ig o r P a u n o v ic , E c o n o m ic A ffa irs O ffic e r o f E C L A C . T h e v ie w s
e x p r e s s e d o n th is d o c u m e n t a re th e s o le r e s p o n s a b ility o f th e a u th o r a n d m a y n o t c o in c id e w ith th o s e o f th e
O r g a n iz a tio n . T h is p a p e r h a s n o t b e e n s u b m itte d t o e d ito r ia l re v is io n .
0 4-06
iii
CONTENTS
Page
A B S T R A C T ...................................................................................................................................................................................
1
I.
I N T R O D U C T I O N .............................................................................................................................................
3
II.
P R E V I O U S S T U D I E S A N D T H E M E T H O D A P P L I E D I N T H I S O N E ..
5
F IS C A L IM P L IC A T IO N S O F T H E C A F T A : A D V E R S E E F F E C T S
8
III.
1.
T h e d i r e c t i o n o f t h e i m p a c t o f t a r i f f e l i m i n a t i o n ......................................................
8
2.
T h e i m p a c t o f t a r i f f e l i m i n a t i o n o n f i s c a l r e v e n u e .................................................
9
3.
T h e im p a c t o f r e d u c tio n in in te r n a l in d ir e c t ta x c o lle c tio n s le v ie d
4.
IV .
o n i m p o r t s .......................................................................................................................................................
12
T h e t o t a l a d v e r s e f i s c a l e f f e c t s o f t h e C A F T A ...........................................................
13
F IS C A L IM P L IC A T IO N S O F T H E C A F T A : P O S IT IV E E F F E C T S
15
1.
P o s s ib le s o u rc e s o f p o s itiv e fis c a l e ffe c ts o f tra d e lib e r a liz a tio n
15
2.
P o s itiv e fis c a l e ffe c ts fro m th e in c re a s e o f im p o rts d u e to th e
C A F T A .............................................................................................................................................................
15
3.
T h e n e t e f f e c t o f t h e C A F T A o n f i s c a l r e v e n u e .........................................................
18
4.
T h e m o s t lik e ly s c e n a rio o f G D P g ro w th a n d th e fis c a l e f fe c ts o f
t h e C A F T A ....................................................................................................................................................
19
C O N C L U S I O N S ................................................................................................................................................
21
R E F E R E N C E S ..........................................................................................................................................................................
23
V.
ABSTRACT
In th is p a p e r w e e s tim a te th e fis c a l im p lic a tio n s o f th e fre e tra d e a g re e m e n t s ig n e d b e tw e e n th e
U n ite d
S ta te s o f A m e r ic a a n d th e f iv e C e n tr a l A m e r ic a n c o u n tr ie s o f C o s ta R ic a , E l S a lv a d o r,
G u a te m a la ,
H o n d u ra s
and
N ic a ra g u a .
O f th e
fiv e
p o s s ib le
e ffe c ts
on
fis c a l
re v en u e
(d ire c t,
in d ire c t, e la s tic ity , s u b s titu tio n a n d in d u c e d ), in th is p a p e r w e e s tim a te th e f ir s t th re e . T h e fo u rth
e f fe c t is m o s t lik e ly n e g lig ib le , w h e r e a s th e
e s tim a tio n
o f th e fifth
o n e w o u ld b e p la g u e d b y
u n c e r ta in ty , so w e d o n o t a tte m p t it h e re . W e u s e c o m p a r a tiv e s ta tic s to e s tim a te th e im p a c t.
W e f in d th e a d v e r s e im p a c t o f t a r i f f e lim in a tio n o n f is c a l r e v e n u e is r e la tiv e ly s m a ll in
C o s ta R ic a a n d N ic a r a g u a , w h e r e a s th e g r e a te s t im p a c t is in H o n d u r a s , w h e r e it a c c o u n ts f o r
a lm o s t a fiv e p e rc e n t lo s s o f ta x re v e n u e in o n ly th e firs t y e a r o f th e A g re e m e n t. T h e lo s s o f
r e v e n u e f r o m i n te r n a l i n d i r e c t t a x e s is m u c h s m a ll e r f o r a ll f i v e c o u n tr ie s . A f t e r s u m m in g t h e t w o
a d v e r s e e f fe c ts d ir e c t a n d in d ire c t), w e f in d th e c o u n tr y le a s t a d v e r s e ly a f fe c te d b y th e a g r e e m e n t
is C o s ta R ic a . In th e f ir s t y e a r o f th e A g r e e m e n t, th e a d v e r s e im p a c t is e x p e c te d to a m o u n t to
0 .2 8 %
o f G D P . T h e c o u n tr y m o s t a d v e r s e ly a f fe c te d is H o n d u r a s , w h o s e r e v e n u e is f o r e c a s t to
d e c lin e 0 .8 2 % o f G D P in th e f ir s t y e a r o f th e A g re e m e n t.
W h e n w e c a lc u la te th e in c re a s e in re v e n u e fro m in d ire c t ta x e s d u e to h ig h e r im p o rts , w e
fa il to f in d s ig n if ic a n t e f f e c t in te r m s o f G D P . D e s p ite th e f a c t th a t in E l S a lv a d o r a n d G u a te m a la
th e r e v e n u e in c r e a s e s a lm o s t 0 .2 %
o f G D P , u n d e r th e m o s t o p tim is tic g r o w th s c e n a rio , it is n o t
e n o u g h to c o m p e n s a te f o r th e lo s s o f fis c a l re v e n u e d u e to th e C A F T A . A fte r a c c o u n tin g f o r th e
p o s itiv e a n d n e g a tiv e re v e n u e im p lic a tio n s , w e c o n c lu d e th a t th e re w o u ld b e a n e t lo s s o f fis c a l
r e v e n u e d u e t o t h e C A F T A i n a ll c o u n tr ie s .
G iv e n th a t in m o s t c a s e s th e f is c a l r e v e n u e lo s s is s m a ll, th e o n ly c o u n tr y t h a t c o u ld h a v e
s e rio u s fis c a l p ro b le m s d u e to th e C A F T A is H o n d u ra s . E v e n u n d e r o u r m o s t o p tim is tic g r o w th
s c e n a r io , th e lo s s is e s tim a te d to b e 0 .7 3 %
la s ts tw e n ty y e a rs , ris in g to 0 .7 8 %
o f G D P a t th e b e g in n in g o f th e tra n s itio n p e rio d th a t
a t th e e n d o f th e p e rio d . H o n d u r a s is a ls o th e e c o n o m y w ith
th e h ig h e s t le v e l o f fis c a l v u ln e r a b ility o f th e f iv e c o u n trie s , w h ic h m e a n s th a t it is le s s p r e p a r e d
to m itig a te th e fis c a l im p lic a tio n s o f th e C A F T A .
T h e o p tim is tic g r o w th s c e n a r io le a d s c o u n tr ie s to b a la n c e - o f - p a y m e n ts c ris e s . O u r m o s t
p e s s im is tic s c e n a r io a s s u m e s s o m e m a jo r d is r u p tio n s to th e c o u n tr y ( e c o n o m ic , p o litic a l a n d /o r
in s titu tio n a l) . T h e r e f o r e , a m o d e r a te g r o w th s c e n a r io is p e r h a p s th e m o s t p la u s ib le f o r th e g r o w th
ra te
of
GD P
fo r
C e n tra l
A m e ric a
in
th e
fu tu re .
A c c o rd in g ly ,
w e
c o n c lu d e
th a t
th e
fis c a l
im p lic a tio n s o f th e C A F T A f r o m th e m o d e r a te g r o w th s c e n a r io a re th e m o s t p ro b a b le .
The
in c re a s e
CAFTA .
in
In
C e n tra l
A m e ric a n
re v e n u e
a s th e ir m a in
a d d itio n ,
c o u n trie s
e c o n o m ic
p o lic y
p o lic ie s
s h o u ld
to
u se
b o th
n e u tra liz e
th a t re la x
th e
d a m p e n s lig h tly th e n e g a tiv e fis c a l im p a c t o f th e C A F T A .
th e
a
re d u c tio n
a d v erse
e x te rn a l
o f e x p e n d itu re
fis c a l
c o n s tra in t
im p lic a tio n s
on
g ro w th
and
an
o f th e
w o u ld
3
I. IN T R O D U C T IO N
In th e f lo o d o f a c tiv itie s u n d e r ta k e n to im p r o v e lin k a g e s w ith th e in te r n a tio n a l e c o n o m y in th e
l a s t f i f t e e n y e a r s i n C e n t r a l A m e r i c a , a r g u a b l y o n e o f t h e m o s t i m p o r t a n t is t h e F r e e T r a d e
A g r e e m e n t , c o m m o n l y k n o w n a s t h e C A F T A , b e t w e e n t h e U n i t e s S ta te s a n d t h e f i v e C e n tr a l
A m e ric a n
c o u n trie s
o f C o s ta R ic a , E l
S a lv a d o r, G u a te m a la , H o n d u ra s
a n d N ic a ra g u a .
I ts
im p o r t a n c e d e r i v e s f r o m t h e f a c t t h a t s u c h a n a g r e e m e n t w o u l d c o n v e r t t h e t e m p o r a r y u n i l a t e r a l
p r i v i l e g e s o f a c c e s s i n g t h e U .S . m a r k e t , g r a n t e d u n d e r t h e C a r i b b e a n B a s i n E c o n o m i c R e c o v e r y
A c t o f 1 9 9 4 (a ls o k n o w n a s th e C a rib b e a n B a s in In itia tiv e ), in to a p e r m a n e n t s ta n d in g a g re e m e n t,
w i t h o u t t h e n e e d f o r c o n s t a n t r e n e w a l. T h e e x p e c t e d p o s i t i v e e f f e c t s f o r C e n t r a l A m e r i c a i n c l u d e
in c re a s e d tra n s p a re n c y o f th e “ ru le s o f th e g a m e ” , re d u c e d d is c re tio n o n th e p a r t o f e c o n o m ic
a u th o ritie s , in c re a s e d fo re ig n d ir e c t in v e s tm e n t, a n d a r e d u c tio n in u n e m p lo y m e n t.
F o r t h e s e r e a s o n s t h e A g r e e m e n t h a s b e e n w e l c o m e d b y t h e e c o n o m i c g r o u p s i n C e n tr a l
A m e r i c a w h i c h a r e n e t e x p o r t e r s t o t h e U .S . m a r k e t , n o t a b l y t h e m a q u i l a d o r a s . O n t h e o t h e r
h a n d , s e c to rs th a t p r o d u c e p r im a rily f o r th e d o m e s tic m a rk e t a n d w e r e p r o te c te d b y ta riff s h a v e
a rg u e d th a t th e y c a n n o t w ith s ta n d th e c o m p e titio n fro m
s t r o n g e r A m e r i c a n p r o d u c e r s . T h is
p o l a r i z a t i o n h a s p r o v o k e d m u c h d i s c u s s i o n o n t h e m e r i t a n d t h e e f f e c t s o f t h e C A F T A , w h i c h is
in c o n t r a s t w i t h t h e f a c t t h a t r e l a t i v e l y f e w s t u d i e s h a d b e e n p u b l i s h e d b e f o r e t h e p r o c e s s o f
n e g o t i a t i o n w a s f in is h e d .
T h e la c k o f re s e a rc h b e fo re
CAFTA
is e s p e c i a l l y
a p p a r e n t i n r e g a r d s t o t h e f is c a l
im p l i c a t i o n s o f t h e a g r e e m e n t . B e f o r e n e g o t i a t i o n s c o n c l u d e d , o n ly t h r e e p a p e r s w e r e p u b l i s h e d
th a t a tte m p te d to e s tim a te th e fis c a l im p a c t o f th e C A F T A o n th e C e n tra l A m e r ic a n c o u n trie s .
H o w e v e r , s i n c e t h e s e s tu d i e s w e r e m a d e p r i o r t o t h e c o n c l u s i o n o f t h e n e g o t i a t i o n p r o c e s s o f t h e
C A F T A , t h e i r r e s u l t s w e r e i n t e n d e d o n ly a s a f r a m e o f r e f e r e n c e f o r d i s c u s s i o n , a n d w e r e r a t h e r
g e n e r i c i n n a t u r e . N o w t h a t t h e f in a l t e x t o f t h e C e n t r a l A m e r i c a n F r e e T r a d e A g r e e m e n t h a s b e e n
p u b l i s h e d , i t is p o s s i b l e t o m a k e m o r e p r e c i s e e s t i m a t e s o f i t s f is c a l i m p l i c a t i o n s . T h i s is t h e
p u rp o s e o f th e p r e s e n t p a p e r.
The
paper
has
fiv e
s e c ti o n s .
A fte r
th is
in tro d u c tio n ,
th e
s e c tio n
2
d is c u s s e s
th e
m e t h o d o l o g y a n d p r e v i o u s s t u d i e s o n t h e s u b je c t . T h e r e a r e t w o m e t h o d s c o m m o n l y u s e d t o
a s s e s s th e
E q u ilib riu m
fis c a l im p lic a tio n s
o f a fre e tra d e
a g re e m e n t.
T he use
o f C o m p u ta b le
G e n e ra l
( C G E ) m o d e l s p r o v i d e s a c o m p r e h e n s i v e m e t h o d t o e s t i m a t e n o t o n ly t h e f is c a l
e f f e c t s , b u t a l s o i m p l i c a t i o n s f o r t h e s o c ia l w e l f a r e a n d c h a n g e s i n t h e p r o d u c t i o n s t r u c t u r e d u e t o
th e F re e T ra d e A g re e m e n t. W e , in s te a d , u s e a c o m p a r a tiv e s ta tic m e th o d , w h ic h s u p p o s e s lin e a r
r e l a t i o n s b e t w e e n t h e v a r i a b l e s , a s o p p o s e d t o b o t h l i n e a r a n d n o n - l i n e a r r e l a t i o n s in t h e C G E
m o d e l s . A l t h o u g h i n t h i s r e s p e c t t h e c o m p a r a t i v e s t a t i c m e t h o d c o u l d b e s e e n a s i n f e r i o r , it d o e s
a l l o w u s t o c o n c e n t r a t e s o le ly o n f is c a l e f f e c t s a n d t o a d o p t s o m e p l a u s i b l e a s s u m p t i o n s t o a s s e s s
th e c h a n g e s in th e tr a n s itio n p e r io d d u rin g w h ic h th e e lim in a tio n o f ta riffs w ill n o t b e a p p lie d to
so m e o f th e g o o d s.
T h e t h i r d s e c t i o n is d e d i c a t e d t o m e a s u r i n g t h e a d v e r s e f is c a l i m p a c t o f t h e C A F T A . O n e
s o u r c e o f t h e r e d u c t i o n o f f is c a l r e v e n u e is t a r i f f e l i m i n a t i o n . T h e i m p a c t is e s t i m a t e d f o r e a c h
4
a n d e v e r y y e a r f r o m t h e m o m e n t t h e A g r e e m e n t e n t e r s i n t o e f f e c t, u n t i l t h e e n d o f t h e t r a n s i t i o n
p e r i o d w h e n a ll g o o d s s h o u l d b e t r a d e d d u t y - f r e e . T h e t r a n s i t i o n p e r i o d w i l l l a s t t w e n t y y e a r s f o r
a v a r i e t y o f g o o d s i n a ll c o u n t r i e s e x c e p t f o r E l S a lv a d o r , w h e r e i t e n d s i n t h e f i f t e e n t h y e a r . T h e
o t h e r s o u r c e o f f is c a l r e v e n u e r e d u c t i o n is i n t e r n a l i n d i r e c t t a x c o l l e c t i o n s l e v i e d o n i m p o r ts . A s
t a r i f f s a r e e l i m i n a t e d , t h e t a x b a s e is r e d u c e d a c c o r d i n g l y , a n d t h e r e v e n u e f r o m t h a t s o u r c e is
d i m i n i s h e d . A t t h e e n d o f t h e s e c ti o n , w e t o t a l t h e t w o a d v e r s e i m p a c t s a n d p r e s e n t t h e r e s u l t s a s
a p e r c e n ta g e o f to ta l ta x re v e n u e , a n d a s th e p e r c e n ta g e o f G D P .
W e a l s o h a v e t o e s t i m a t e p o s s i b l e p o s i t i v e e f f e c t s o f t h e A g r e e m e n t . I t is l i k e l y t h a t th e
r e v e n u e f ro m in te rn a l in d ir e c t ta x e s ( v a lu e -a d d e d ta x e s a n d th e lik e ) w o u ld in c re a s e d u e to th e
i n c r e a s e i n t h e v o l u m e o f i m p o r t s t h a t w i l l b e c h e a p e r o n c e t h e t a r i f f s h a v e b e e n e l i m i n a t e d . T h is
e f f e c t d e p e n d s o n th e e x p e c te d g r o w th ra te s o f th e e c o n o m y , a n d o n th e in c o m e e la s tic itie s o f
im p o r t s . W e u s e t h r e e s c e n a r i o s f o r t h e g r o w t h r a t e s t o e s t i m a t e t h e p o s i t i v e e f f e c t s o f t h e
C A F T A in th e s e c tio n 4 o f th e p a p e r. T h e la s t s e c tio n p r e s e n ts th e c o n c lu s io n s o f th e p a p e r.
5
II. P R E V IO U S S T U D IE S A N D T H E M E T H O D A P P L IE D IN T H IS O N E
A
s tu d y b y L e d e r m a n , P e r r y
and
S u escú n
(2 0 0 2 ) o f th e W o rld B a n k w a s th e firs t a tte m p t to
a s s e s s th e fis c a l c o s t o f th e C A F T A . T h e ir a n a ly s is is m u c h b r o a d e r th a n th e a im s o f th is p a p e r
s in c e
it is a im e d
a t u n d e rs ta n d in g
U n ite d
S ta te s o f
A m e r ic a a n d th e C e n tra l A m e r ic a n c o u n trie s . H e n c e , th e fis c a l e f fe c t o f th e C A F T A
is o n ly a
s m a ll p a r t o f t h e i r s tu d y .
T hey
a se t o f tra d e
re la te d
is s u e s b e tw e e n
e s tim a te th a t th e to ta l e lim in a tio n
th e
o f ta riffs o n th e A m e ric a n
e x p o r ts p lu s th e e f f e c t o n in te r n a l in d ir e c t ta x e s le v ie d o n im p o r ts ( V A T ) w ill c o s t th e C e n tra l
A m e r ic a n c o u n tr ie s b e tw e e n 3 % a n d 8 % o f th e ir ta x r e v e n u e . T h e le a s t a ffe c te d c o u n try is C o s ta
R ic a , w h ile th e m o s t a ffe c te d o n e is H o n d u ra s .
The
second
s tu d y
c o n d u c te d
re g a rd in g th e fis c a l im p a c t o f th e
CA FTA
is a p a p e r b y
B a rre ix , V ille la a n d R o c a (2 0 0 3 ) fro m th e In te r-A m e ric a n D e v e lo p m e n t B a n k . T h e y e s tim a te th e
im p a c t o f ta r if f e lim in a tio n
C e n tra l
A m e ric a ,
and
fo r th e
fo r th e
M e r c o s u r c o u n trie s , th e
C a rib b e a n
c o u n trie s
u s in g
A ndean
d iffe re n t
C o m m u n ity
in te g ra tio n
o f N a tio n s ,
s c e n a rio s
th a t
c o m p ris e th e F r e e T ra d e A re a o f th e A m e ric a s , fre e tra d e a g re e m e n ts o f e a c h o f th e s e g ro u p s
w ith th e U S A , a n d th e M e rc o s u r-A n d e a n C o m m u n ity o f N a tio n s fre e tra d e a re a . In th e c a s e o f
th e C A F T A th e ir e s tim a te o f th e fis c a l im p a c t o f ta r if f e lim in a tio n a m o u n ts to
r e v e n u e f o r N ic a r a g u a a s th e lo w e r e x tr e m e , a n d 7 .5 %
1 .6 %
o f th e ta x
f o r H o n d u r a s a s th e u p p e r e x tre m e , w ith
th e c a s e s o f C o s ta R ic a , E l S a lv a d o r a n d G u a te m a la in b e tw e e n .
F in a lly , P a u n o v ic
a n d M a rtín e z
(2 0 0 4 ) fro m
U N
ECLA C
c o n d u c t a s im ila r s tu d y
but
c o n fin e th e ir e s tim a te o n ly to th e fis c a l im p a c t o f th e e lim in a tio n o f ta riffs a n d th e re d u c tio n o f
in d ir e c t ta x e s le v ie d o n im p o r ts (V A T ) in th e f ir s t y e a r o f th e A g re e m e n t. T h e y e s tim a te th re e
s c e n a r io s , f r o m a s m a ll r e d u c tio n o f ta r if f s to a s c e n a r io in v o lv in g a la r g e le v e l o f t a r i f f r e d u c tio n .
In th e c a s e o f th e s c e n a r io th a t im p lie s th e la r g e s t r e d u c tio n o f ta r if f s d u r in g th e tr a n s itio n p e rio d ,
th e a u th o rs e s tim a te th e lo s s o f fis c a l re v e n u e in th e f irs t y e a r o f th e A g re e m e n t to b e e q u a l to
1 .9 % o f t a x r e v e n u e f o r N i c a r a g u a , a n d 4 .4 % f o r H o n d u r a s , w i t h t h e o t h e r c o u n tr i e s i n b e tw e e n .
The
e s tim a tio n
is
s u b s e q u e n tly
re la te d
to
th e
fis c a l
v u ln e ra b ility
o f th e
C e n tra l
A m e ric a n
c o u n tr ie s in o r d e r to re v e a l w h ic h c o u n tr y is b e tte r p r e p a r e d to w ith s ta n d th e a d v e rs e im p a c t o n
its f is c a l b a la n c e .
In
th is
paper
w e
w ant
to
a rriv e
to
as
p re c is e
an
e s tim a te
as
p o s s ib le ,
g iv e n
th a t
n e g o tia tio n s a re o v e r a n d th e f in a l te x t o f th e A g r e e m e n t h a s b e e n m a d e p u b lic . T h e m e th o d o f
c o m p a r a tiv e s ta tic s a llo w s u s to e s tim a te th e fis c a l im p lic a tio n s o f th e C A F T A u n d e r th e “ c e te ris
p a r ib u s ” c la u s e .
S p e c ific a lly , w e u s e th e y e a r 2 0 0 2
a s th e b a s e y e a r, a n d a n a ly z e w h a t w o u ld
h a v e h a p p e n e d h a d th e C A F T A e n te r e d in to e f fe c t in th a t y e a r.
I t is u s e fu l to d is tin g u is h fiv e p o s s ib le fis c a l e ffe c ts o f a c h a n g e in a c o m m e rc ia l p o lic y .1
T hese
a re
d ire c t, in d ir e c t,
e la s tic ity ,
s u b s titu tio n
and
in d u c e d
e ffe c ts . T h e
r e s u lt o f th e ta r if f r e d u c tio n o r e lim in a tio n . T h e in d ir e c t e f fe c t s te m s f r o m
d ire c t e ffe c t is th e
th e lo s s o f re v e n u e
a s s o c ia te d w ith th e in te r n a l in d ir e c t ta x e s th a t a re le v ie d o n th e im p o r te d g o o d s ( v a lu e - a d d e d ta x ,
See, for example, Barreix, Villela and Roca (2003).
6
e x c is e ta x , a n d s im ila r ta x e s ). T h e s e a re le v ie d o n th e C IF v a lu e o f th e im p o rts , a u g m e n te d b y th e
v a lu e
o f th e
ta riffs p a id
w hen
th e y
w e re
im p o rte d .
S in c e th e
g o o d s w ill e n te r fre e
o f ta riffs
( e x c e p t t h e g o o d s s till p r o t e c te d d u r in g t h e t r a n s it i o n p e r io d ) , t h e s e t a x e s w ill b e l e v ie d o n ly o n
th e C IF v a lu e , o n c e th e A g r e e m e n t h a s c o m e in to e ffe c t. G iv e n th a t th e a d v e r s e e f f e c t o n th e
in te rn a l
in d ire c t ta x e s
is
caused
by
th e
e lim in a tio n
o f ta riffs ,
it fo llo w s
c lo s e ly
th e
p a th
of
re d u c tio n o f th e ta r i f f re v e n u e . T h e s e tw o e ffe c ts a re e s tim a te d in th e th ir d s e c tio n o f th e p a p e r.
T o g e t th e o v e ra ll p ic tu re o f th e fis c a l im p lic a tio n s o f th e A g re e m e n t, h o w e v e r, th is lo s s
o f fis c a l re v e n u e m u s t b e
c o n tra s te d w ith
any
p o s s ib le p o s itiv e
e ffe c ts .
T h e p rim a ry
p o s itiv e
s o u rc e is th e e la s tic ity e ffe c t th a t is p ro d u c e d b y th e (p ro b a b le ) in c re a s e in th e v o lu m e o f im p o rts .
S in c e th e im p o r te d g o o d s a re c h e a p e r d u e to th e r e d u c tio n o r e lim in a tio n o f im p o r t d u tie s , it is
lik e ly th a t th e v o lu m e im p o r te d w o u ld in c re a s e . A c c o r d in g ly , r e v e n u e fro m th e in te r n a l ta x e s th a t
a re le v ie d o n im p o r ts w o u ld a ls o rise .
T h e m a g n itu d e o f th a t e ffe c t w ill d e p e n d o n th e e la s tic itie s o f im p o rts a n d th e ra te s o f
g r o w th o f th e C e n tra l A m e r ic a n e c o n o m ie s . A s th e r a te o f g r o w th is e x tre m e ly d if f ic u lt to p r o je c t
w ith a n y c e rta in ty b e y o n d a h o riz o n o f o n e o r tw o y e a rs , w e u s e th re e s c e n a rio s to e s tim a te a
ra n g e
o f o u tc o m e s .
O ne
s c e n a rio
th a t is b a s e d
on
z ero
p e r c a p ita
g ro w th
g iv e s
us
a lo w e r
b o u n d a r y . T h e u p p e r b o u n d a r y is g iv e n b y th e r a te o f g r o w th o f p o te n tia l o u tp u t. L a s tly , th e th ir d
s c e n a r io is a n e c o n o m e tr ic e s tim a tio n o f th e fu tu r e g r o w th b a s e d o n th e h is to r ic a l ra te o f g ro w th ,
m e a s u r e d a s th e a v e r a g e p e r fo r m a n c e o f th e C e n tra l A m e r ic a n c o u n tr ie s in th e la s t tw e n ty y e a rs .
T o th is ra te o f g ro w th , w e a d d th e g ro w th e ffe c t o f th e C A F T A
its e lf, e s tim a te d b y H in o jo s a -
O je d a (2 0 0 3 ).
H in o jo s a - O je d a a ls o e s tim a te s th e r e w o u ld b e n o tr a d e d iv e r s io n d u e to th e C A F T A , so in
th is p a p e r w e d o n o t c o n s id e r th a t p o s s ib le e f f e c t o n re v e n u e . I t is th e s u b s titu tio n e ffe c t, a n d is
d u e to th e d iv e rs io n o f tra d e th a t u s u a lly a c c o m p a n ie s fre e tra d e a g re e m e n ts a n d c u s to m s u n io n s .
In th is c a s e , h o w e v e r , th e a v e r a g e ta r i f f ra te s in th e C e n tra l A m e r ic a n c o u n tr ie s a re a lre a d y so
lo w (b e tw e e n 4 %
a n d 7 % ) th a t th is e f fe c t c o u ld b e c o n s id e re d n e g lig ib le . A
s im ila r c la im
c o u ld
b e f o u n d in L e d e rm a n , P e rry a n d S u e s c ú n (2 0 0 2 ).
N e ith e r d o w e e s tim a te a n y in d u c e d e ffe c ts w h ic h a re th e c h a n g e in ta x re v e n u e d u e to th e
change
in
th e
A g re e m e n t
s tru c tu re
has
com e
of
in to
p ro d u c tio n ,
e ffe c t.
The
re s u ltin g
re aso n
is
fro m
th a t
in
th e
new
a
case
set
of
w h e re
in c e n tiv e s
th e
a fte r
tra n s itio n
th e
p e rio d
c o m p ris e s tw e n ty y e a rs , w e a re fa c e d w ith c o n d itio n s o f d e e p u n c e rta in ty . S in c e w e k n o w n e ith e r
th e a p p r o p ria te c o n c e p tu a l m o d e ls th a t d e s c rib e th e r e la tio n s h ip s a m o n g th e k e y f o r c e s th a t w ill
s h a p e th e lo n g -te rm
about key
v a ria b le s
fu tu re , n o r th e p ro b a b ility d is trib u tio n s n e e d e d to c h a ra c te riz e u n c e rta in ty
and
p a ra m e te rs
in
th e
m a th e m a tic a l
re p re s e n ta tio n s
o f th e s e
c o n c e p tu a l
m o d e ls , w e a re u n a b le to m a k e a n y r e a s o n a b le e s tim a te s .2 In o rd e r to re d u c e th e s e u n c e rta in tie s ,
it w o u ld b e n e c e s s a r y to a d o p t a s s u m p tio n s o f in te r - te m p o r a l b e h a v io u r in th e v a r ia b le s in v o lv e d ,
s o m e th in g th a t w e c o u ld n o t d o d u e to in fo rm a tio n c o n s tra in ts .
A
fe w
e x a m p le s m a y
c la rif y
th is p o in t.
In th e
m e d iu m
te rm , th e
in c e n tiv e s fa c e d
by
c o m p a n ie s in C e n tra l A m e r ic a w ill c h a n g e n o t o n ly b e c a u s e o f th e C A F T A , b u t a ls o b e c a u s e o f
th e
e s ta b lis h m e n t
o f th e
F re e
T rad e
A re a
o f th e
A m e ric a s
F o r m o re d e ta ils see L e m p e rt, P o p p e r a n d B a n k e s , 2 0 0 3 .
(F T A A ),
th e
C e n tra l
A m e ric a n
7
C u s to m s U n io n , a n d p o s s ib ly a fre e tr a d e a g r e e m e n t w ith th e E u ro p e a n U n io n . T h e s e c h a n g e s
w i l l h a v e s u c h a p r o f o u n d i m p a c t o n t h e p r o d u c t i v e s t r u c t u r e o f t h e C e n tr a l A m e r i c a n e c o n o m i e s
t h a t i t is e x t r e m e l y d i f f i c u l t t o e n v i s i o n t h e r e g i o n t w e n t y y e a r s f r o m n o w , a n d e v e n m o r e s o t o
e s t i m a t e w i t h s o m e c e r t a i n t y t h e i m p l i c a t i o n s f o r f i s c a l r e v e n u e d u e t o o n ly o n e o f t h e s e f a c to r s .
A n o t h e r c r u c ia l d e v e l o p m e n t , a g r e e d t o i n t h e D o h a R o u n d w i t h i n t h e W o r l d T r a d e O r g a n i z a t i o n
a n d w i t h p r o f o u n d i m p a c t s o n b o t h f i s c a l r e v e n u e a n d t h e p r o d u c t i v e s tr u c t u r e , is t h e e n d o f
s u b s i d i e s i n t h e f o r m o f f is c a l e x e m p t i o n s f o r f i r m s i n E x p o r t P r o c e s s i n g Z o n e s b y 2 0 0 9 . T h is
w ill
a d v e rs e ly
a ffe c t C o s ta
R ic a ,
El
S a lv a d o r
and
G u a te m a la
(v ia
a
p o s s ib le
m a q u i l a d o r a s ), b u t i t m i g h t h a v e a p o s i t i v e i m p a c t i n H o n d u r a s a n d N i c a r a g u a ,
exodus
of
c o u n trie s
e x e m p te d fro m th a t ru le d u e to th e ir lo w p e r c a p ita G D P .
F i n a l l y , t w e n t y y e a r s a g o t h r e e o f t h e f i v e C e n tr a l A m e r i c a n c o u n t r i e s w e r e s u b m e r g e d in
c i v il w a r s , a n d a ll f i v e c o u n t r i e s w e n t t h r o u g h a d i f f i c u l t e c o n o m i c p e r i o d c a u s e d b y t h e d e b t
c ris is o f th e 1 9 8 0 s. T h u s, a tw o - d e c a d e p e r io d c o u ld b r in g e c o n o m ic , p o litic a l a n d in s titu tio n a l
c h a n g e s t h a t c a n n o t r e a d i l y b e e n v i s i o n e d , w h i c h m a k e s a p p r o p r i a t e m o d e l l i n g f a r m o r e d if f i c u lt .
I n s u m , t h e e f f e c t o n f is c a l r e v e n u e d u e t o a c h a n g e i n t h e s t r u c t u r e o f p r o d u c t i o n r e s u l t i n g f r o m
t h e C A F T A is , i n o u r o p in io n , s i m p ly t o o u n c e r t a i n t o b e a s s e s s e d w i t h r e a s o n a b l e p r e c is io n .
T h u s , o f t h e f i v e p o s s i b l e f is c a l e f f e c t s , w e a t t e m p t t o a s s e s s t h r e e o f th e m . T h e d i r e c t a n d
i n d i r e c t e f f e c t s w i l l p r o d u c e a n e g a t i v e i m p a c t o n t h e f i s c a l r e v e n u e . T h e e l a s t i c i t y e f f e c t w ill
a t t e n u a t e t h e a d v e r s e im p a c t , s o w e c o u l d c a l c u l a t e t h e n e t i m p a c t b y s u b t r a c t i n g t h a t e f f e c t f r o m
t h e s u m o f t h e f i r s t tw o . T h e f o u r t h o n e , t h e s u b s t i t u t i o n e f f e c t, is l i k e l y t o b e n e g l i g i b l e , w h e r e a s
t h e l a s t o n e ( th e i n d u c e d e f f e c t ) is n o t e s t i m a t e d h e r e d u e t o t h e d i f f i c u l t i e s i t s a s s e s s m e n t
im p l ie s .
8
III. F IS C A L IM P L IC A T IO N S O F T H E C A F T A : A D V E R S E E F F E C T S
In th is s e c tio n w e e s tim a te th e n e g a tiv e im p a c ts o f th e C A F T A o n fis c a l re v e n u e . W e f ir s t d is c u s s
th e d ir e c tio n o f th e im p a c t o f ta r if f e lim in a tio n . T h e n , w e p r e s e n t o u r e s tim a te o f th e im p a c t o f
th e
e lim in a tio n
o f ta riffs a n d th e w a y
it w a s c a lc u la te d . W e n e x t p r e s e n t th e
e s tim a te
o f th e
im p a c t th e r e d u c tio n o f ta r if f s w ill h a v e o n th e r e v e n u e fro m in te r n a l in d ir e c t ta x e s le v ie d o n th e
im p o r te d g o o d s . F in a lly , w e p r e s e n t th e e s tim a te o f th e to ta l n e g a tiv e fis c a l c o n s e q u e n c e s o f th e
CAFTA .
1. T h e d i r e c t i o n o f t h e i m p a c t o f t a r i f f e l i m i n a t i o n
T h e lite r a tu r e o n th e r e v e n u e im p lic a tio n s o f tr a d e lib e r a liz a tio n , in te r a lia T a n z i (1 9 8 9 ), B le je r
and
C h e a s ty
n e g a tiv e .
In
(1 9 9 0 ),
th e
case
c o n c lu d e s
o f th e
th a t th e
CAFTA ,
e ffe c ts
h o w e v e r,
a re
u n c e rta in ,
w e
have
i.e .
s tro n g
th e y
c o u ld
reaso n s
to
be
p o s itiv e
b e lie v e
or
th a t th e
e lim in a tio n o f ta r if f s - c e te r is p a rib u s - w o u ld u n d o u b te d ly h a v e a n a d v e rs e fis c a l im p a c t. T h e re
a re th r e e b a s ic r e a s o n s f o r th is .
F irs t, th e lite r a tu r e h a s e s ta b lis h e d th a t fis c a l r e v e n u e c o u ld a c tu a lly in c r e a s e w ith tr a d e
lib e ra liz a tio n i f th e ta r if f ra te s a re o rig in a lly a b o v e th e re v e n u e -m a x im iz in g le v e l (fo r e x a m p le ,
G e e n a w a y a n d M iln e r 1 9 9 1 ; B e v a n
1 9 9 5 ; E b rill, S to ts k y a n d G ro p p , 1 9 9 9 ). O n e o f th e re a s o n s
w h y th e re is a n o n -lin e a r re la tio n s h ip b e tw e e n th e ta r if f ra te s a n d re v e n u e is th e e x is te n c e o f ta x
e v a s io n . H ig h t a r i f f r a te s in c r e a s e in c e n tiv e s to s m u g g le im p o r te d g o o d s . T h u s , a s t a r if f r a te s g o
d o w n w ith
re s u lts
in
tra d e
lib e ra liz a tio n , th e
a h ig h e r re v e n u e
in c e n tiv e f o r ta x
fo r th e
G o v e rn m e n t.
In
e v a s io n
th e
case
d e c r e a s e s a s w e ll, a n d th is th e n
o f C e n tra l
h o w e v e r, th e a v e r a g e ta r if f s h a v e a lre a d y b e e n r e d u c e d to th e 4 %
A m e ric a n
c o u n trie s ,
to 7 % r a n g e in th e la s t fif te e n
y e a rs . T h is is c le a rly b e lo w th e r e v e n u e - m a x im iz in g le v e l, so f u r th e r r e d u c tio n o f ta r if f s d u e to
th e C A F T A c a n n o t b e e x p e c te d to in c re a s e th e fis c a l re v e n u e . A d d itio n a lly , g iv e n th a t ta riffs a re
a lr e a d y lo w , t h e n e g a t i v e im p a c t o f t h e i r e li m in a t io n is b o u n d t o b e s m a ll.
S e c o n d , th e re is a n o th e r p o s s ib le p o s itiv e e ffe c t o f tra d e lib e ra liz a tio n th a t re n d e rs th e
o v e ra ll
im p a c t u n c e rta in ,
n a m e ly ,
th e
ta riffic a tio n
o f q u a n tita tiv e
r e s tric tio n s .
I f q u a n tita tiv e
re s tric tio n s a re n u m e ro u s , th e ir ta riffic a tio n c a u s e s th e re v e n u e to in c re a s e s in c e th e s u rp lu s th a t
w a s p re v io u s ly a p p ro p ria te d p riv a te ly n o w g o e s in to G o v e rn m e n t c o ffe rs . B u t h e re a g a in , d u e to
t h e s t r u c tu r a l r e f o r m s o f t h e l a s t t w o d e c a d e s , q u a n ti t a t i v e r e s t r ic ti o n s h a v e a ll b u t d i s a p p e a r e d in
C e n tra l A m e ric a . T h e re fo re , th is p o s s ib le
so u rc e o f in c re a s e
o f fis c a l re v e n u e th a n k s to tra d e
lib e r a liz a tio n d o e s n o t e x is t a n y m o re .
F in a lly , a n d m o s t im p o rta n t, s in c e th e U S a n d th e C e n tra l A m e r ic a n c o u n tr ie s a re f o r m in g
a f r e e tr a d e a re a , th e r e w ill b e t a r if f e lim in a tio n o n m o s t tr a d e d g o o d s , th e im p a c t o f w h ic h is
c le a rly a d v e rs e f o r th e T re a s u ry . In th e c a s e o f ta r if f r e d u c tio n th e re m ig h t b e a p o s s ib ility
of
r e v e n u e e n h a n c e m e n t, d u e to th e tw o e ffe c ts d is c u s s e d a b o v e , b u t in th e c a s e o f ta r i f f e lim in a tio n ,
th e a m b ig u ity o f th e im p a c t d is a p p e a rs . T h u s , th e r e v e n u e c o n s e q u e n c e s a re c le a rly a d v e rs e .
9
2. T h e im p a c t o f t a r if f e lim in a tio n on fisc a l r e v e n u e
A s w a s m e n tio n e d
a b o v e , th e re
a re tw o b a s ic
C e n tra l A m e r ic a n c o u n trie s : th o s e fro m
s o u rc e s o f fis c a l re v e n u e le v ie d
ta riffs a n d th o s e fro m
im p o rts . W e firs t p re s e n t th e s ig n ific a n c e o f b o th o f th e m
o n im p o r ts in
in te r n a l in d ir e c t ta x e s le v ie d o n
in te rm s o f G D P a n d in te rm s o f ta x
re v e n u e o f th e C e n tra l A m e r ic a n c o u n trie s .
A s s h o w n b e l o w i n t a b l e 1, t h e r e v e n u e f r o m t a x e s o n i m p o r t s r e p r e s e n t s a r e l a t i v e l y h i g h
p r o p o r tio n o f th e to ta l ta x r e v e n u e , r a n g in g f r o m 3 0 % to 4 0 % . T h e p a r tic ip a tio n o f ta r if f s in to ta l
ta x
re v en u e ,
h o w e v er,
has been
s te a d ily
d e c lin in g
due
to
th e
s u c c e s s iv e
tra d e
lib e ra liz a tio n
m e a s u r e s in th e p a s t tw e n ty y e a rs . A s a re s u lt, th e r e v e n u e fro m in te r n a l ta x e s le v ie d o n im p o r ts
is n o w tw o to th r e e tim e s m o r e im p o r ta n t th a n th e r e v e n u e f r o m ta riffs .
T able 1
P A R T IC IP A T IO N IN G D P A N D IN T O TA L T A X R E V E N U E
O F TH E R E V E N U E F R O M T A R IFFS A N D IN T E R N A L
IN D IR E C T T A X E S L E V IE D O N IM PO R T S
(Percentages)
P articipation in
GDP
P articipation in total tax
revenues
Tariffs
0,83
6,32
Indirect taxes
3,38
25,64
T otal
4,21
31,96
Tariffs
1,09
9,7
Indirect taxes
3,44
30,66
T otal
4,53
40,36
Tariffs
1,24
11,73
Indirect taxes
2,88
27,17
T otal
4,12
38,9
Tariffs
1,99
12,54
Indirect taxes
2,73
17,17
T otal
4,72
29,71
Tariffs
1,79
7,89
Indirect taxes
5,18
22,88
T otal
6,97
30,77
T ype o f taxes
C osta R ica
E l Salvador
G uatem ala
H onduras
N icaragua
Source: author’s calculation, on the basis of official data.
10
S in c e w e d o n o t h a v e a d e t a i l e d d a t a o n t h e s o u r c e s o f f is c a l r e v e n u e f r o m im p o r t s , w e
e s tim a te th e im p a c t o f th e C A F T A in d ir e c tly .3 W e a s s u m e th a t th e p r o p o rtio n o f th e im p o r ts f ro m
t h e U .S . t o t o t a l i m p o r t s o f t h e C e n t r a l A m e r i c a n c o u n t r i e s r o u g h l y e q u a l s t h e p r o p o r t i o n o f t h e
r e v e n u e f r o m c u s t o m d u t i e s r e s u l t i n g f r o m t h e i m p o r t s o f g o o d s f r o m t h e U .S . t o t h e t o t a l t a r i f f
rev en u e:
M US ^
M
tot
T US
Ttot
(1 )
w h e r e M US r e p r e s e n t s i m p o r t s f r o m t h e U .S . n e t o f i m p o r t s f o r o f f s h o r e i n b o n d p r o d u c t i o n
( m a q u i l a ) , M TOT a r e t o t a l i m p o r t s n e t o f i m p o r t s f o r o f f s h o r e i n b o n d p r o d u c t i o n ( m a q u i l a ) , 4 TUS
is t h e r e v e n u e f r o m t a r i f f s d u e t o t h e i m p o r t s o f g o o d s f r o m t h e U .S ., a n d TTOT is t o t a l r e v e n u e
f r o m ta r i f f s . W e h a v e t o u s e t h i s a s s u m p t i o n s in c e w e h a v e n e i t h e r t h e d a t a o n TUS, n o r t h e
d e t a i l e d s t r u c t u r e o f TUS b y p r o d u c t s . T h u s , w e h a d t o e s t i m a t e t h e i m p a c t o n r e v e n u e in d i r e c t l y ,
u s in g th e s u ffic ie n tly d e ta ile d in f o rm a tio n o n in te r n a tio n a l c o m m e rc e .
W e u s e d t h e d a t a f r o m t h e U n i t e d S ta te s D e p a r t m e n t o f C o m m e r c e ( 2 0 0 2 ) a t t h e 1 0 - d ig it
l e v e l o f t h e H a r m o n i z e d S y s te m . T h is l e v e l o f d e t a il a l l o w s t h e a n a l y s i s o f t a r i f f e l i m i n a t i o n
d u rin g th e tr a n s itio n p e r io d s in c e th e p u b lis h e d n e g o tia te d te x ts e x p re s s th e ta r i f f e lim in a tio n
s c h e d u l e s a t t h e 8 - d i g i t l e v e l o f t h e H a r m o n i z e d S y s te m . A f t e r a s s i g n i n g a c o r r e s p o n d i n g l e t t e r
d e s c r ib in g th e s c h e d u le o f e lim in a tio n o f c u s to m d u tie s 5 to e a c h ite m th a t e n te rs in to a c a te g o ry
o f g o o d s p r o te c te d d u rin g th e tr a n s itio n p e rio d , w e c a lc u la te d th e in d iv id u a l s c h e d u le s f o r e a c h
i te m . N e x t , w e c a l c u l a t e d t h e t o t a l s c h e d u l e o f e l i m i n a t i o n o f t a r i f f s f o r e a c h C e n tr a l A m e r i c a n
c o u n try b y s u m m in g u p th e in d iv id u a l ite m s .6 T h e re s u lts a re p re s e n te d in ta b le 2 a s a p e rc e n ta g e
o f t h e i m p o r t s f r o m t h e U .S . t h a t w i l l r e m a i n w i t h s o m e l e v e l o f t a r i f f p r o t e c t i o n d u r i n g th e
t r a n s i t i o n p e r io d . T h e b a s e y e a r is 2 0 0 2 .
3
W e w o u ld n e e d d a ta o n th e fisc a l r e v e n u e fro m im p o rts o f g o o d s o rig in a tin g fro m th e U n ite d
S ta te s a t th e le v e l o f th e 8 -d ig it H a r m o n iz e d S y s te m c la s s ific a tio n to e s tim a te th e im p a c t d ire c tly .
4
W e u s e im p o r t d a ta n e t o f th e im p o rts f o r m a q u ila d o r a s sin c e th e la tte r d o n o t p a y c u s to m
d u tie s. F o r th a t re a so n , th e y d is to rt th e p ic tu re o f th e p a rtic ip a tio n o f im p o rts fro m th e U .S . in th e to ta l
im p o rts.
5
T h e re a re 17 s c h e d u le s , c o rre s p o n d in g to le tte rs A , B , C , D , E , F , G , H , M , N , O , P , Q , R , T ,
U a n d V , e a c h w ith d if fe r e n t p ro file o f e lim in a tio n o f c u s to m d u tie s . S ee th e A n n e x 3 .3 o f th e te x t o f th e
A g re e m e n t, a n d G e n e ra l N o te s f o r e a c h o f th e c o u n trie s f o r d e ta ils.
6
In th e c a se o f C o s ta R ic a , th e re w e re 9 9 0 2 im p o r t ite m s in th e y e a r 2 0 0 2 . F o r E l S a lv a d o r th e
n u m b e r is 6 0 9 7 , f o r G u a te m a la 8 7 9 7 , H o n d u ra s 6 7 1 2 , a n d f o r N ic a r a g u a 3 0 6 4 .
11
Table 2
PERCENTAGE OF THE VALUE OF IMPORTS FROM THE U.S. THAT WILL NOT
ENTER DUTY-FREE DURING THE TRANSITION PERIOD
(The base year is 2002)
Country\Y ear
1
2
3
4
5
Costa Rica
7,61
6,77
5,79
4,81
El Salvador
6,67
5,77
4,82
Guatemala
7,14
6,29
Honduras
5,39
Nicaragua
10,45
6
7
8
9
10
11
12
13
14
15
16
17
18
19
3,83
3,27 2,51
1,75
1,00
0,24
0,19
0,13
0,10
0,06
0,02
0,01
0,01
0,01
0,00
3,86
2,91
2,42
1,85
1,28
0,71
0,15
0,09
0,03
0,02
0,01
5,39
4,48
3,57
2,97
2,28
1,60
0,92
0,23
0,19
0,14
0,10
0,05
0,00
0,00
0,00
0,00
0,00
4,75
4,05
3,36
2,66
2,22
1,71
1,19
0,68
0,17
0,13
0,09
0,06
0,03
0,00
0,00
0,00
0,00
0,00
9,47
8,42
7,37
6,32
5,73
4,93
4,14
3,34
2,55
2,22
1,89
1,58
1,26
0,81
0,55
0,29
0,02
0,01
Source: author’s calculation, on the basis of official data.
The
fis c a l
im p a c t
o f ta r if f e lim in a tio n
fo r th e
fiv e
c o u n trie s
in
th e
firs t y e a r
o f th e
A g r e e m e n t is m o re p r o n o u n c e d th a n th a t e s tim a te d b y P a u n o v ic a n d M a r tín e z (2 0 0 4 ), e v e n in
th e ir s c e n a rio in v o lv in g a la r g e le v e l o f ta r if f r e d u c tio n . A c c o r d in g to th e r e s u lts in ta b le 2 , in
H o n d u ra s th e ta x re v e n u e fro m
fro m
c u s to m
d u tie s le v ie d o n th e im p o rts fro m
th e U .S . w o u ld d r o p
1 0 0 % in th e b a s e y e a r ( 2 0 0 2 ) to o n ly 5 .4 % in th e f ir s t y e a r o f th e C A F T A . T h e s itu a tio n is
s im ila r in
o th e r c o u n trie s , w ith
th e
im p a c t in N ic a ra g u a th e
s m a lle s t, n a m e ly ,
a re d u c tio n
to
1 0 .4 % . T h e r e s t o f th e c o u n tr ie s a r e p la c e d b e tw e e n th e s e e x tr e m e s . T h e s e f ig u r e s d e c r e a s e y e a r
b y y e a r u n til th e y b e c o m e n e g lig ib le ( b e lo w
1 % ) in th e n in th y e a r a fte r th e A g re e m e n t c o m e s
in to e f f e c t f o r a ll c o u n tr i e s , e x c e p t N i c a r a g u a , w h e r e t h is p o i n t is r e a c h e d in t h e f i f te e n t h y e a r .
N e x t, w e
w a n te d
to
see h o w
th a t lo s s tra n s la te s in to
c a lc u la te d th e p a rtic ip a tio n o f ta r if f re v e n u e fro m
re v e n u e b y u s in g
th e
a s s u m p tio n
fro m
th e
a lo s s
o f ta x
im p o rte d g o o d s fro m
e q u a tio n
(1 ), a n d th e
re v en u e . W e
firs t
th e U .S . in to ta l t a r i f f
d a ta fro m
ta b le
1. W e t h e n
a p p lie d to th is th e re s u lts fro m ta b le 2. T h a t w a y w e o b ta in e d th e lo s s o f ta r if f re v e n u e d u e to th e
C A F T A in te rm s o f ta x re v e n u e . A s s h o w n in ta b le 3 , th e a d v e rs e im p a c t o n re v e n u e is re la tiv e ly
s m a ll in C o s ta R ic a a n d N ic a r a g u a , b e lo w tw o p e r c e n ta g e p o in ts o f to ta l ta x r e v e n u e . T h e h ig h e s t
im p a c t is in H o n d u r a s , w h e r e it a lre a d y re a c h e s a lm o s t fiv e p e r c e n t o f th e ta x r e v e n u e in o n ly th e
f ir s t y e a r o f th e A g re e m e n t.
The
b u lk
o f th e
im p a c t
fo r
a ll
th e
c o u n trie s
w o u ld
be
fe lt
in
th e
firs t y e a r
o f th e
A g re e m e n t. T h e im p a c t in c r e a s e s a fte rw a rd s , b u t o n ly m a rg in a lly . In th e c a s e o f C o s ta R ic a , f o r
e x a m p le , fro m
th e
r e v e n u e to 1 .8 9 % .
firs t to
th e
se c o n d y e a r th e
im p a c t in c re a s e s fro m
1 .8 7 %
o f th e to ta l ta x
12
Table 3
LOSS OF TARIFF REVENUE DUE TO THE CAFTA DURING THE TRANSITION PERIOD,
AS A PERCENTAGE OF THE TOTAL TAX REVENUE
Country\Y ear
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Costa Rica
1,87
1,89
1,91
1,93
1,95
1,96
1,98
1,99
2,01
2,02
2,02
2,03
2,03
2,03
2,03
2,03
2,03
2,03
2,03
El Salvador
3,00
3,03
3,06
3,09
3,12
3,13
3,15
3,17
3,19
3,21
3,21
3,21
3,21
3,21
3,21
3,21
3,21
3,21
3,21
Guatemala
3,66
3,69
3,73
3,76
3,80
3,82
3,85
3,88
3,91
3,93
3,93
3,94
3,94
3,94
3,94
3,94
3,94
3,94
3,94
Honduras
4,84
4,87
4,91
4,94
4,98
5,00
5,03
5,06
5,08
5,11
5,11
5,11
5,11
5,11
5,12
5,12
5,12
5,12
5,12
Nicaragua
1,72
1,74
1,76
1,78
1,80
1,81
1,83
1,85
1,86
1,88
1,88
1,89
1,89
1,90
1,91
1,91
1,92
1,92
1,92
Source: author’s calculation, on the basis of official data.
3 . T h e im p a c t o f r e d u c tio n in in t e r n a l in d ir e c t ta x c o lle c tio n s le v ie d o n im p o r ts
A s ta riff s a re r e d u c e d o r e lim in a te d , th e in te rn a l in d ir e c t ta x e s su c h a s v a lu e - a d d e d ta x , e x c is e ta x
a n d s im ila r ta x e s th a t a re le v ie d o n th e C IF v a lu e o f th e im p o r ts a u g m e n te d b y th e v a lu e o f th e
t a r i f f s p a i d w h e n t h e s e g o o d s w e r e i m p o r t e d , w i l l a l s o b e a f f e c te d . T h e e l i m i n a t i o n o f t a r i f f s
( e x c e p t f o r t h e g o o d s s till p r o t e c t e d d u r i n g t h e t r a n s i t i o n p e r i o d ) , w i l l r e d u c e f is c a l r e v e n u e s in c e
t h e s e i n t e r n a l t a x e s a r e l e v i e d o n ly o n t h e C I F v a l u e , o n c e t h e A g r e e m e n t h a s c o m e i n t o f o r c e .
F o r th a t re a s o n th e r e d u c tio n o f re v e n u e fro m
in te rn a l ta x e s f o llo w s th e p a th o f th e
r e d u c t i o n o f r e v e n u e f r o m ta r i f f s . T h u s , w e a p p l i e d t h e r e s u l t s o b t a i n e d i n t a b l e 2 t o t h e r e v e n u e
f r o m i n t e r n a l t a x e s c o m i n g f r o m t h e i m p o r t s o f g o o d s f r o m t h e U .S . a f f e c t e d b y t h e e l i m i n a t i o n
o f ta r i f f s . T o o b t a i n t h e l a tte r , w e f i r s t h a d t o c a l c u l a t e c o l l e c t e d t a r i f f r a t e s , 7 f o l l o w i n g t h e
s u g g e s t i o n o f E b r i l l , S to ts k y a n d G r o p p ( 1 9 9 9 ) . N e x t , w e c a l c u l a t e d t h e r e v e n u e f r o m i n t e r n a l
t a x e s l e v i e d o n t h e i m p o r t s o f U .S . g o o d s :
I T US = I T to ^ x M u ^ x C T R
T T tot
M tot
(2 )
w h e r e I T US is t h e p r o p o r t i o n o f t h e r e v e n u e c o m i n g f r o m i n t e r n a l t a x e s l e v i e d o n i m p o r t s o f U .S .
g o o d s , I T tot is f is c a l r e v e n u e f r o m i n t e r n a l i n d i r e c t t a x e s , T T tot is t o t a l t a x r e v e n u e , a n d C T R is
t h e c o l l e c t e d t a r i f f r a te .
7
C o lle c te d t a r i f f ra te is a ra tio o f re v e n u e fro m ta riff s to im p o r t v a lu e s . T h e c o lle c te d t a r i f f ra te
f o r C o s ta R ic a w a s 2 .8 3 % in 2 0 0 2 , E l S a lv a d o r 3 .9 7 % , G u a te m a la 4 .7 5 % , H o n d u ra s 4 .3 7 % , a n d 2 .5 1 %
f o r N ic a ra g u a .
13
F i n a l l y , w e a p p l i e d t h e r e s u l t s o f t a b l e 2 t o I T US t o o b t a i n t h e l o s s o f r e v e n u e d u e t o t h e
r e d u c t i o n o f i n d i r e c t t a x e s l e v i e d o n i m p o r t e d g o o d s ( t a b l e 4 ). T h e l o s s o f r e v e n u e f r o m i n t e r n a l
i n d i r e c t t a x e s is n o t la r g e . I n t h i s c a s e , t h e g r e a t e s t l o s s is i n t h e c a s e o f G u a t e m a l a w i t h 0 .4 % o f
to ta l ta x re v e n u e , a n d E l S a lv a d o r a c lo s e se c o n d . T h e lo s s e s o f th e o th e r C e n tra l A m e r ic a n
n a t i o n s a r e e v e n s m a lle r .
Table 4
LOSS OF REVENUE FROM INTERNAL INDIRECT TAXES LEVIED ON IMPORTS DUE TO THE CAFTA DURING
THE TRANSITION PERIOD, AS A PERCENTAGE OF THE TOTAL TAX REVENUE
Country\Y ear
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Costa Rica
0,22
0,22
0,22
0,22
0,22
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
El Salvador
0,38
0,38
0,38
0,39
0,39
0,39
0,40
0,40
0,40
0,40
0,40
0,40
0,40
0,40
0,40
0,40
0,40
0,40
0,40
Guatemala
0,40
0,41
0,41
0,41
0,42
0,42
0,42
0,43
0,43
0,43
0,43
0,43
0,43
0,43
0,43
0,43
0,43
0,43
0,43
Honduras
0,29
0,29
0,29
0,30
0,30
0,30
0,30
0,30
0,30
0,31
0,31
0,31
0,31
0,31
0,31
0,31
0,31
0,31
0,31
Nicaragua
0,13
0,13
0,13
0,13
0,13
0,13
0,13
0,13
0,14
0,14
0,14
0,14
0,14
0,14
0,14
0,14
0,14
0,14
0,14
Source: author’s calculation, on the basis of official data.
4. T h e to ta l a d v e r s e fis c a l e ffe c t o f th e C A F T A
S u m m in g u p th e tw o re v e n u e - re d u c in g im p lic a tio n s o f th e C A F T A , w e o b ta in th e to ta l a d v e rs e
e f f e c t. F o r t h e s a k e o f t h e e a s e o f c o m p a r i s o n , w e e x p r e s s it f i r s t a s a p r o p o r t i o n o f t h e t o t a l t a x
r e v e n u e ( t a b l e 5 ), a n d t h e n a s a p r o p o r t i o n o f G D P ( t a b l e 6 ).
T able 5
T O T A L L O S S O F R E V E N U E D U E T O T H E C A F T A D U R IN G T H E T R A N S IT IO N
PE R IO D , A S A P E R C E N T A G E O F T O T A L T A X R E V E N U E
C ountry\Y ear
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
C osta R ica
2,1
2,1
2,1
2,2
2,2
2,2
2,2
2,2
2,2
2,3
2,3
2,3
2,3
2,3
2,3
2,3
2,3
2,3
2,3
E l S alvador
3,4
3,4
3,4
3,5
3,5
3,5
3,5
3,6
3,6
3,6
3,6
3,6
3,6
3,6
3,6
3,6
3,6
3,6
3,6
G uatem ala
4,1
4,1
4,1
4,2
4,2
4,2
4,3
4,3
4,3
4,4
4,4
4,4
4,4
4,4
4,4
4,4
4,4
4,4
4,4
H onduras
5,1
5,2
5,2
5,2
5,3
5,3
5,3
5,4
5,4
5,4
5,4
5,4
5,4
5,4
5,4
5,4
5,4
5,4
5,4
N icaragua
1,8
1,9
1,9
1,9
1,9
1,9
2,0
2,0
2,0
2,0
2,0
2,0
2,0
2,0
2,0
2,1
2,1
2,1
2,1
Source: tables 3 and 4.
14
T h e l e a s t a f f e c t e d c o u n t r y is C o s t a R i c a . I n t h e f i r s t y e a r o f t h e A g r e e m e n t , a c c o r d i n g t o
o u r c a l c u l a t i o n s , t h e a d v e r s e i m p a c t w o u l d a m o u n t t o 0 . 2 8 % o f G D P . T h i s w i l l s l o w ly in c r e a s e ,
t o a m a x i m u m le v e l o f 0 .3 0 % o f G D P t e n y e a r s a f t e r t h e C A F T A c o m e s i n t o e f f e c t, a n d t h e n
r e m a i n s a t t h i s le v e l f r o m t h e n o n . E l S a l v a d o r w i l l h a v e a n i m p a c t e q u a l t o 0 .3 8 % o f G D P a t t h e
s ta rt o f th e
CAFTA,
and
0 .4 1 %
fro m
th e
e le v e n th y e a r o n w a rd s.
The
s ta rtin g
fig u re
fo r
G u a t e m a l a is 0 .4 3 % o f G D P a n d 0 .4 6 % w i l l b e r e a c h e d i n t h e e i g h t h y e a r o f t h e a g r e e m e n t.
N i c a r a g u a s ta r t s w i t h a n i m p a c t e q u i v a l e n t t o 0 .4 2 %
o f G D P , s l o w l y r i s i n g t o 0 .4 7 % i n t h e
s i x t e e n t h y e a r . F i n a l l y , t h e m o s t a f f e c t e d c o u n t r y is H o n d u r a s , w h o s e r e v e n u e w ill d e c l i n e 0 .8 2 %
o f G D P a l r e a d y in t h e f i r s t y e a r o f t h e A g r e e m e n t . T h e p l a t e a u w i l l b e r e a c h e d i n t h e n i n t h y e a r
o f t h e a g r e e m e n t , w i t h a l o s s o f 0 .8 6 % o f G D P .
Table 6
TOTAL LOSS OF REVENUE DUE TO THE CAFTA DURING THE TRANSITION PERIOD, AS A PERCENTAGE OF GDP
Country\Y ear
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Costa Rica
0,28
0,28
0,28
0,28
0,29
0,29
0,29
0,29
0,29
0,30
0,30
0,30
0,30
0,30
0,30
0,30
0,30
0,30
0,30
El Salvador
0,38
0,38
0,39
0,39
0,39
0,40
0,40
0,40
0,40
0,40
0,41
0,41
0,41
0,41
0,41
0,41
0,41
0,41
0,41
Guatemala
0,43
0,43
0,44
0,44
0,45
0,45
0,45
0,46
0,46
0,46
0,46
0,46
0,46
0,46
0,46
0,46
0,46
0,46
0,46
Honduras
0,82
0,82
0,83
0,83
0,84
0,84
0,85
0,85
0,86
0,86
0,86
0,86
0,86
0,86
0,86
0,86
0,86
0,86
0,86
Nicaragua
0,42
0,42
0,43
0,43
0,44
0,44
0,44
0,45
0,45
0,46
0,46
0,46
0,46
0,46
0,46
0,47
0,47
0,47
0,47
Source: tables 3 and 4.
T h e r e a r e s e v e r a l r e a s o n s w h y C o s t a R i c a is t h e l e a s t a f f e c t e d c o u n t r y a n d H o n d u r a s t h e
m o s t a f f e c t e d o n e . F i r s t l y , t a r i f f r e v e n u e i n C o s t a R i c a in 2 0 0 2 w a s e q u i v a l e n t t o o n ly 0 .8 3 % o f
G D P , th e
lo w e s t o f th e
fiv e
c o u n trie s ,
as
o p p o s e d to
1 .9 9 %
in H o n d u ra s .
S e c o n d ly , th e
p r o p o r t i o n o f t h e i m p o r t s f r o m t h e U n i t e d S ta te s t h a t a r e s u b j e c t t o t a r i f f s ( i m p o r t s w i t h o u t
m a q u i l a ) is t h e s e c o n d l o w e s t i n C o s t a R i c a ( 3 2 .1 %
o f th e to ta l im p o rts ), w h ile a g a in th a t
p r o p o r t i o n is t h e h i g h e s t in H o n d u r a s a t 4 0 .8 % . T h i r d l y , a t t h e b e g i n n i n g o f t h e t r a n s i t i o n p e r io d ,
t a r i f f s w i l l b e l e v i e d o n 7 . 6 1 % o f t h e v a l u e o f i m p o r t s f r o m t h e U n i t e d S ta te s t h a t e n t e r s C o s t a
R i c a , w h e r e a s t h a t p e r c e n t a g e f o r H o n d u r a s is o n ly 5 .3 9 % . F i n a l l y , e a c h o f t h e f i v e c o u n t r i e s h a s
a d if fe r e n t im p o r t s tru c tu re a n d a d if fe r e n t p r o file o f e lim in a tio n o f c u s to m
d u tie s , w h i c h is
r e f l e c t e d i n t h e d i v e r g e n c e o f t h e i r l o s s e s o f f is c a l r e v e n u e . S in c e t h e b u l k o f t h e l o s s o f f is c a l
r e v e n u e c o m e s f r o m t h e r e d u c t i o n a n d e l i m i n a t i o n o f ta r i f f s , t h e r e s u l t s f r o m t h e r e d u c t i o n o f
r e v e n u e f r o m i n d i r e c t i n t e r n a l t a x e s d o n o t c h a n g e t h e o v e r a l l p ic tu r e . T h e r e f o r e , a c o m b i n a t i o n
o f a ll o f t h e s e f a c t o r s is r e s p o n s i b l e f o r t h e d i f f e r i n g r e s u l t s a m o n g t h e f i v e c o u n t r i e s w i t h r e s p e c t
to th e fis c a l c o s t o f th e C A F T A .
15
IV . F IS C A L IM P L I C A T I O N S O F T H E C A F T A : P O S IT IV E E F F E C T S
1. P o s s i b l e s o u r c e s o f p o s i t i v e f i s c a l e f f e c t s o f t r a d e l i b e r a l i z a t i o n
O n th e p o s itiv e s id e , th e r e a re tw o p o s s ib le s o u r c e s th a t h a v e to b e ta k e n in to a c c o u n t. O n e c o m e s
fr o m ta riffs , a n d th e o th e r fro m in te rn a l in d ir e c t ta x e s . U n f o r tu n a te ly , it is c e rta in th a t th e f o r m e r
w o u ld b e v ir tu a lly z e r o in th e c a s e o f th e C A F T A , w h ic h le a v e s o n ly th e la tte r to b e e s tim a te d .
I f it h a d n o t b e e n th e c a s e o f t a r i f f e lim in a tio n , b u t in s te a d th e r e d u c tio n in ta r i f f ra te s in
th e C A F T A , w e w o u ld h a v e re a s o n s to e x p e c t a p o s itiv e e ffe c t o n fis c a l re v e n u e fro m
th e firs t
s o u rc e . N a m e ly , th e r e d u c tio n o f ta r if f s p r o d u c e s a p o s itiv e in c o m e e ffe c t, r e s u ltin g in a n in c r e a s e
o f d e m a n d f o r im p o r te d g o o d s , a n d a s u b s e q u e n t ris e in im p o r te d v o lu m e o f g o o d s . T h is in c re a s e
enhances
fis c a l
re v en u e ,
p a rtly
c o m p e n s a tin g
fo r
th e
a d v erse
e ffe c t
o f th e
ta r if f re d u c tio n
d e s c rib e d in th e s e c tio n 3 . In th e c a s e o f ta r i f f e lim in a tio n , h o w e v e r , th e in c r e a s e in v o lu m e o f
im p o rte d g o o d s h a s n o b e a rin g o n ta r if f re v e n u e f o r o b v io u s re a s o n s . T h u s , in th e c a s e o f th e
C A F T A , a p o s itiv e im p a c t o n th e re v e n u e fro m th a t s o u rc e is n e g lig ib le s in c e , d e p e n d in g o n th e
c o u n try , ta r if f s w ill b e e lim in a te d f o r n in e ty to n in e ty - f iv e p e r c e n t o f th e g o o d s im p o r te d f r o m th e
U n ite d S ta te s .
2 . P o s itiv e fis c a l e ffe c ts f r o m t h e in c r e a s e o f im p o r ts d u e to t h e C A F T A
T h a t le a v e s u s w ith th e o th e r s o u rc e o f p o s s ib le p o s itiv e e ffe c ts o n fis c a l re v e n u e . T h a n k s to th e
c h e a p e r im p o rts th e d e m a n d fo r im p o rte d g o o d ris e s a n d w ith th e in c re a s e in v o lu m e o f im p o rte d
g o o d s th e re v e n u e fro m
in te rn a l in d ir e c t ta x e s r is e s to o . T h e m a g n itu d e o f th e e f fe c t d e p e n d s
c ritic a lly o n tw o fa c to rs : th e a s s u m e d ra te o f g ro w th o f G D P , a n d th e in c o m e e la s tic ity o f im p o rts
f o r e a c h c o u n try . W e o b ta in e d d a ta o n th e in c o m e e la s tic ity o f im p o r ts f r o m
CEPA L
(2 0 0 3 a ).
T h e e s tim a te s o f th e fu tu r e ra te o f g r o w th o f G D P , h o w e v e r, a re m o r e c o m p lic a te d . O n e m u s t
a s s u m e d iffe re n t s c e n a rio s in o rd e r to
c a p tu r e a r a n g e o f p o s s ib ilitie s , g iv e n th a t th e f u tu r e is
u n k n o w n . F o r th is re a s o n w e a s s u m e d th re e d iffe re n t s c e n a rio s .
T h e f irs t o n e is a n o p tim is tic s c e n a rio , w h e r e th e fiv e e c o n o m ie s g r o w a c c o rd in g to th e ir
p o te n tia l. W e u s e th e e s tim a te s o f th e p o te n tia l g ro w th ra te fro m R o s (2 0 0 3 ). T h e s e c o n d s c e n a rio
is a m o d e r a te o n e , a n d is ta k e n f r o m
C E P A L (2 0 0 3 a ). T h e m o s t lik e ly f u tu r e r a te o f g r o w th o f
G D P in C e n tra l A m e r ic a is e s tim a te d o n th e b a s is o f e c o n o m e tr ic m o d e ls u s in g h is to ric a l d a ta
fro m
th e
1 9 8 0 -2 0 0 1
p e rio d .8 W e
c a ll
th e m
“ h is to ric ”
ra te s .
F in a lly ,
a
p e s s im is tic
s c e n a rio
(“ d e m o g r a p h ic r a te s ” ) a s s u m e s th a t th e f u tu r e ra te o f g r o w th w ill b e e q u a l to th e r a te o f g r o w th o f
p o p u l a t i o n , i.e ., t h e p e r c a p i t a g r o w t h w o u l d b e
e q u a l to
z e ro . F o r th is
s c e n a rio w e u s e d th e
p ro je c tio n s o f p o p u la tio n g ro w th ra te s fro m C E P A L (2 0 0 3 b ).
8
T h e o n ly e x c e p tio n is th e ra te o f g r o w th o f N ic a ra g u a . A lth o u g h C E P A L ( 2 0 0 3 a ) ta k e s th e
lo w e r b o u n d a r y (1 .9 % ) a s th e m o s t lik e ly in th e n e x t te n y e a rs , w e u s e th e a v e ra g e o f th e u p p e r a n d lo w e r
b o u n d a r ie s (2 .5 % ).
16
T h e r a t e s i n a ll t h r e e s c e n a r i o s w e r e a u g m e n t e d b y t h e p r o j e c t e d i n c r e a s e i n t h e r a t e o f
g r o w th o f G D P d u e to th e C A F T A , e s tim a te d b y H in o jo s a -O je d a (2 0 0 3 ). U s in g a C G E m o d e l fo r
th e “ G re a te r N o r th A m e r ic a ” r e g io n (N A F T A , C A C M a n d C A R IC O M ) h e e s tim a te s d iffe r e n t
s c e n a r i o s o f i n t e g r a t i o n i n t h a t r e g io n , i n o r d e r t o h i g h l i g h t t h e e f f e c t s o f p o s s i b l e p o l i c y o p tio n s .
H e r e p o r t s b o t h p o t e n t i a l s t a t i c a n d d y n a m i c g a i n s i n t e r m s o f G D P , e x p o r t s , im p o r t s , w a g e s a n d
o th e r r e le v a n t v a ria b le s . W e ta k e th e ra te s o f g r o w th o f G D P th a t in c lu d e b o th s ta tic ( re la tiv e ly
s m a ll) a n d d y n a m i c ( m u c h l a r g e r ) e f f e c t s o f t h e C A F T A . T h e s e r a t e s w e r e a d d e d t o t h e t h r e e
s c e n a r i o s s i n c e n o s c e n a r i o t a k e s i n t o a c c o u n t t h e i n c r e a s e o f G D P d u e t o t h e C A F T A ( t a b l e 7 ).
T h e r a t e s H i n o j o s a - O j e d a e s t i m a t e s a r e 0 . 7 6 % f o r C o s t a R i c a , 1 .5 9 % f o r E l S a lv a d o r , 2 . 3 2 % f o r
G u a t e m a l a , 0 .8 9 % f o r H o n d u r a s , a n d 1 .4 9 % f o r N i c a r a g u a .
Table 7
ESTIMATES OF GROWTH OF GDP FOR CENTRAL AMERICAN COUNTRIES, WITHOUT AND
WITH THE EFFECT OF CAFTA
(Percentages)
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Potential
rate
4,74
5,35
7,17
6,22
6,94
"Historic" "Demographic"
rate
rate
3,50
1,51
2,60
1,49
3,30
2,42
2,90
2,08
2,50
1,91
Optimistic
scenario
5,50
6,94
9,49
7,11
8,43
Moderate
Pessimistic
scenario
scenario
4,26
2,27
4,19
3,08
5,62
4,74
3,79
2,97
3,99
3,40
Source: Ros (2003) for potential rate; CEPAL (2003a) for “historic” rate; CEPAL (2003b) for “demographic”
rate; the three scenarios are those three rates augmented by the CAFTA effect estimated in HinojosaOjeda (2003).
W ith th e s e th r e e g r o w th s c e n a rio s w e a re in a p o s itio n to e s tim a te th e in c re a s e s o f im p o r ts
f o r e a c h s c e n a r i o u s i n g t h e i n c o m e e l a s t i c i t i e s o f i m p o r t s ( t a b l e 8 ). T h e r e s u l t i n g r a t e s o f g r o w t h
o f im p o r ts ( A M
tot
) w e r e th e n u s e d to c a lc u la te th e im p a c t o f th e C A F T A o n th e p r o p o rtio n o f
r e v e n u e c o m i n g f r o m i n t e r n a l t a x e s l e v i e d o n i m p o r t s o f U .S . g o o d s t o t h e t o t a l ( I T US ).
W e f ir s t a p p lie d th e ra te s o f g r o w th o f im p o r ts ( A M
tot
) t o t o t a l i n d i r e c t in t e r n a l r e v e n u e
a s a p r o p o r t i o n o f G D P i n 2 0 0 2 ( I T TOT 2002 ) t o o b t a i n t h e r e v e n u e f r o m i n d i r e c t t a x e s f o r t h e t h r e e
g r o w t h s c e n a r i o s w i t h t h e C A F T A ( I T TOT
cafta
). T h e d i f f e r e n c e b e t w e e n t h e t w o is t h e to ta l
c h a n g e o f r e v e n u e f r o m i n d i r e c t i n t e r n a l t a x e s ( A IT TOT
cafta
). H o w e v e r , s in c e t h e i m p o r t s f r o m
17
the United States are only part o f the total imports, we then applied that proportion ( — — ) to
M tot
the total change of revenue from indirect internal taxes to obtain the proportion
of revenue
coming from internal taxes levied on imports o f U.S. goods to the total ( AITUS CAFTA ). In this way
w e obtained the magnitude o f the positive fiscal effect o f the CAFTA for Central America.
As is clear from the last column o f table 8, the increase o f revenue from indirect taxes due
to higher imports from the U.S. is not very significant in terms o f GDP. Even though in El
Salvador and Guatemala the revenue increases almost 0.2% o f GDP under the most optimistic
scenario, it is not enough to compensate for the loss estimated in section 2.
Table 8
ESTIMATES OF THE INCREASE IN INDIRECT INTERNAL REVENUE DUE TO THE CAFTA
WITH THREE DIFFERENT GROWTH SCENARIOS
(% change, coefficients, and %of GDP)
Scenario
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
a m tot
1I T
J-TOT CAFTA
%change
%of GDP
I TTOT _2002
%of GDP
A IT
J-TOT CAFTA
M US
A IT S_ CAFTA
‘-UJU
%of GDP
M TOT
coefficient
%of GDP
Optimistic
8.24
3.66
3.38
0.28
0.32
0.09
Moderate
6.39
3.60
3.38
0.22
0.32
0.07
Pessimistic
3.40
3.49
3.38
0.11
0.32
0.04
Optimistic
16.74
4.02
3.44
0.58
0.33
0.19
Moderate
10.10
3.79
3.44
0.35
0.33
0.11
Pessimistic
7.41
3.69
3.44
0.25
0.33
0.08
Optimistic
19.65
3.45
2.88
0.57
0.34
0.19
Moderate
11.63
3.22
2.88
0.34
0.34
0.11
Pessimistic
9.81
3.16
2.88
0.28
0.34
0.10
Optimistic
7.61
2.94
2.73
0.21
0.41
0.09
Moderate
4.06
2.84
2.73
0.11
0.41
0.05
Pessimistic
3.18
2.82
2.73
0.09
0.41
0.04
Optimistic
12.64
5.83
5.18
0.65
0.24
0.16
Moderate
5.99
5.49
5.18
0.31
0.24
0.07
Pessimistic
5.09
5.44
5.18
0.26
0.24
0.06
Source: author’s calculation, on the basis of official data.
18
3. T h e n e t e ffe c t o f th e C A F T A on fisc a l r e v e n u e
Here we join our estimates o f the total loss and total gain due to the CAFTA to obtain the net
revenue implications o f the Agreement. The total loss is a product o f the direct and indirect
effects, i.e., o f the loss o f revenue due to the reduction and elimination o f tariffs, and the loss o f
revenue coming from the indirect taxes levied on imports. The gain is the product o f the increase
in revenue from indirect taxes levied on imports thanks to the rise in the volume o f imports. The
overall picture emerging from table 9 is that there is bound to be a net loss o f fiscal revenue due
to the CAFTA. The positive effects from the increase o f the volume o f imports are overwhelmed
by the combined effect o f the reduction o f revenue from the custom duties and from the internal
indirect taxes levied on imports. This is true even under the most optimistic scenario where the
growth o f imports is very strong.
Table 9
NET LOSS OF FISCAL REVENUE DUE TO THE CAFTA DURING THE TRANSITION PERIOD,
WITH THREE GROWTH SCENARIOS
(Percentages of GDP)
Country\Y ear
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Optimistic
0,19
0,19
0,19
0,19
0,20
0,20
0,20
0,20
0,21
0,21
0,21
0,21
0,21
0,21
0,21
0,21
0,21
0,21
0,21
Moderate
0,21
0,21
0,21
0,21
0,22
0,22
0,22
0,22
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
0,23
Pessimistic
0,24
0,24
0,24
0,25
0,25
0,25
0,25
0,26
0,26
0,26
0,26
0,26
0,26
0,26
0,26
0,26
0,26
0,26
0,26
Optimistic
0,19
0,19
0,20
0,20
0,20
0,21
0,21
0,21
0,21
0,21
0,22
0,22
0,22
0,22
0,22
0,22
0,22
0,22
0,22
Moderate
0,26
0,27
0,27
0,28
0,28
0,28
0,28
0,29
0,29
0,29
0,29
0,29
0,29
0,29
0,29
0,29
0,29
0,29
0,29
Pessimistic
0,29
0,30
0,30
0,31
0,31
0,31
0,31
0,32
0,32
0,32
0,32
0,32
0,32
0,32
0,32
0,32
0,32
0,32
0,32
Optimistic
0,24
0,24
0,25
0,25
0,25
0,26
0,26
0,26
0,27
0,27
0,27
0,27
0,27
0,27
0,27
0,27
0,27
0,27
0,27
Moderate
0,32
0,32
0,32
0,33
0,33
0,34
0,34
0,34
0,35
0,35
0,35
0,35
0,35
0,35
0,35
0,35
0,35
0,35
0,35
Pessimistic
0,33
0,34
0,34
0,35
0,35
0,35
0,36
0,36
0,36
0,37
0,37
0,37
0,37
0,37
0,37
0,37
0,37
0,37
0,37
Optimistic
0,73
0,74
0,74
0,75
0,75
0,76
0,76
0,77
0,77
0,77
0,78
0,78
0,78
0,78
0,78
0,78
0,78
0,78
0,78
Moderate
0,77
0,78
0,78
0,79
0,79
0,80
0,80
0,81
0,81
0,81
0,81
0,82
0,82
0,82
0,82
0,82
0,82
0,82
0,82
Pessimistic
0,78
0,78
0,79
0,80
0,80
0,81
0,81
0,82
0,82
0,82
0,82
0,83
0,83
0,83
0,83
0,83
0,83
0,83
0,83
Optimistic
0,26
0,27
0,27
0,28
0,28
0,28
0,29
0,29
0,30
0,30
0,30
0,30
0,30
0,30
0,31
0,31
0,31
0,31
0,31
Moderate
0,34
0,35
0,35
0,36
0,36
0,37
0,37
0,37
0,38
0,38
0,38
0,38
0,39
0,39
0,39
0,39
0,39
0,39
0,39
Pessimistic
0,36
0,36
0,37
0,37
0,38
0,38
0,38
0,39
0,39
0,39
0,39
0,40
0,40
0,40
0,40
0,40
0,40
0,40
0,40
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Source: author’s calculation, on the basis of official data.
19
However, the situation is not so gloomy for four o f the Central American countries. For
Costa Rica the net loss is between 0.19% o f GDP and 0.24%, depending on the assumed rate o f
growth o f GDP. By the end o f the transition period, these figures rise to 0.21% o f GDP in the
optimistic scenario and to 0.26% in the pessimistic one. In El Salvador, Guatemala and
Nicaragua, losses are slightly larger, but do not exceed 0.4% o f GDP by the end o f the transition
period.
The only country which could have serious fiscal problems due to the CAFTA is
Honduras. Even under the optimistic growth scenario, the loss is estimated to be 0.73% o f GDP
at the beginning o f the transition period, rising to 0.78% at the end o f it. Comparable figures for
the pessimistic scenario are 0.78% and 0.83% o f GDP, respectively. As was pointed out in
Paunovic and Martínez (2004), Honduras is also the economy with the highest level o f fiscal
vulnerability o f the five countries, which further exacerbates the fiscal implications o f the
CAFTA for that country.
4. The most likely scenario of GDP growth and the fiscal effects of the CAFTA
After we have seen the estimates o f losses due to the CAFTA, the next important issue is the
probability o f realization o f the three scenarios w e have been working with. The pessimistic
scenario clearly assumes that major disturbances may happen, such as a global recession or
severe external or internal shocks. Despite the fact that a global recession is a real possibility, it is
unlikely to last twenty years. On the other hand, it is to be expected that the Central American
countries have learned how costly civil wars are. Thus, the pessimistic scenario, in our opinion, is
not very likely.
The optimistic scenario, however desirable, is not easily attainable. To see this, we
compared the rate o f growth o f imports calculated for the optimistic scenario with the long-term
rate o f growth o f exports (1950-1997). As depicted in table 10, Costa Rica is the only country
where the rate o f growth o f exports required for maintaining the existing balance o f payment
situation comes close to be sufficiently high. In all other cases, the projected growth o f GDP
rapidly worsens the external balance and leads to a balance-of-payments crisis. The meaning o f
these numbers is clear: the optimistic growth scenario is very unlikely, given the current
productive structure o f the economies, and their respective import and export elasticities.
Since the optimistic scenario is not very probable, that leaves us with the moderate growth
scenario. This, in fact, is the most plausible scenario o f the growth rate o f GDP in Central
America in the future. Accordingly, the fiscal implications o f the CAFTA o f this scenario are the
most probable.
20
Table 10
RATE OF GROWTH OF EXPORTS REQUIRED TO MAINTAIN THE EXTERNAL BALANCE
UNCHANGED IN THE CASE OF THE OPTIMISTIC SCENARIO OF THE GDP GROWTH
(Percentages)
Rate of growth of
GDP (optimistic
scenario)
Income elasticities
of imports
Rate of growth of
imports in the
optimistic growth
of GDP scenario
Rate of growth of
exports in the
1950-1997 period
Costa Rica
5.5
1.5
8.2
5.9
El Salvador
6.9
2.4
16.7
4.5
Guatemala
9.5
2.1
19.6
5.6
Honduras
7.1
1.1
7.6
3.4
Nicaragua
8.4
1.5
12.6
4.3
Source: author’s calculation, on the basis of official data.
21
V . C O N C L U S IO N S
O f the five possible effects o f the CAFTA on fiscal revenue in the Central American countries
(direct, indirect, elasticity, substitution and induced), we estimate the first three in this paper. The
fourth one is most likely negligible, while the estimation of the fifth is plagued with uncertainty,
so w e do not attempt it here.
The adverse impact of tariff elimination on fiscal revenue is relatively small in Costa Rica
and Nicaragua, below two percentage points o f the total tax revenue o f each o f the countries. The
highest impact is in Honduras, where it reaches almost five percent of the tax revenue already in
the first year o f the Agreement. The loss o f revenue from internal indirect taxes is not as large.
The greatest loss is in the case o f Guatemala (0.4% o f the total tax revenue), with El Salvador a
close second. The losses in other countries are even less.
When w e total the two adverse effects, we find the country least adversely affected is
Costa Rica. In the first year o f the Agreement, the adverse impact amounts to 0.28% o f GDP. The
greatest loss o f 0.30% o f GDP will be reached ten years after the CAFTA comes into effect. The
most affected country is Honduras, whose fiscal revenue will decline by 0.82% o f GDP in only
the first year of the Agreement. The plateau will be reached in the ninth year, with a reduction
equivalent to 0.86% o f GDP.
There are several reasons why Costa Rica is the least affected country and Honduras most
affected, with the remaining countries somewhere in between. These reasons include the
proportion of the tariff revenue in the GDP of each country, the proportion of the imports from
the United States that actually pay tariffs (imports without m a q u ila ) in the total imports, the
percentage of the imports that are not subject to tariffs during the transition period, and the import
structure and profile o f elimination o f custom duties. Therefore, a combination o f all o f these
factors is responsible for the differing results among the five countries with respect to the fiscal
cost o f the CAFTA.
When w e calculate the increase of revenue from indirect taxes due to higher imports, we
see that it is not very significant in terms o f GDP. Even though in El Salvador and Guatemala the
revenue increases almost 0.2% o f GDP under the most optimistic scenario, it is not enough to
compensate for the loss o f fiscal revenue due to the CAFTA.
Summing the positive and negative revenue implications, w e estimate that there would be
a net loss o f fiscal revenue due to the CAFTA in all countries. The positive effects from the
increase of imports are overwhelmed by the combined effect of the reduction of revenue from the
custom duties and from the internal indirect taxes levied on imports.
The only country that could have serious fiscal problems due to the CAFTA is Honduras.
Even in the optimistic growth scenario, the loss is estimated to be 0.73% o f GDP at the beginning
o f the transition period, rising to 0.78% at the period’s end. Comparable figures for the
pessimistic growth scenario are 0.78% and 0.83% o f GDP, respectively. Honduras is also the
22
economy with the highest level of fiscal vulnerability of the five countries, which further
exacerbates the fiscal implications of the CAFTA for that country.
The optimistic growth scenario leads countries to balance-of-payments crises. On the
other hand, the pessimistic one supposes some major disruptions (economic, political and/or
institutional) to the economy. Therefore, a moderate growth scenario is the most plausible for the
growth rate of GDP in Central America in the future. Accordingly, the fiscal implications of the
CAFTA of that scenario are the most probable.
Economic policies that relax the external constraint on growth would dampen the negative
fiscal impact of the CAFTA. However, they are only part of the solution to the problem, given
that countries have other means to counter the adverse fiscal implications of the CAFTA.
Countries could neutralize them by a combination of a reduction of expenditure and an increase
in revenue. The last option is especially recommended for the Central American countries since
their tax burden is relatively low, below the Latin American average.
23
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24
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