Axel Schimmel-pfennig

Position: Advisor, African Department

Institution: International Monetary Fund

Expertise: International macroeconomics

Axel is a national of Germany, and studied economics at the University of Tübingen, the University of North Carolina at Chapel Hill, and the University of Kiel where he completed his masters and doctorate in economics. Since 1999, Axel has worked at the International Monetary Fund in a number of capacities. He is currently the IMF’s mission chief to Uganda and an Advisor in the IMF's African Department. From 2012-16, he was the senior resident representative in South Africa. Before coming to the IMF, Axel worked as a research associated at the Kiel Institute of World Economics where he consulted for the German Ministry of Economics on raising potential growth and reducing structural unemployment. He also taught econometrics in the Institute’s Advanced Studies in International Economic Policy Research program. Axel has written on fiscal and external sustainability, sovereign debt crises, public debt management, the effectiveness of fiscal policy, pension reform, labor markets, and promoting high and sustained growth.

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Editor's Corner

Who pays the price?

Since 2014, trade protection in South Africa has increased. Frozen chicken – a staple for poorer consumers – is one example of a product that has been subjected to a range of tariffs and protections, including anti-dumping duties.

In this edition of Econ3x3, we publish a careful econometric analysis by Lawrence Edwards and Matthew Stern. They measure the impact of tariffs on three consumer products – frozen chicken, pasta, and frozen chips. Of these, frozen chicken is by far the most important item for poorer consumers.

Although local producers, represented by the SA Poultry Association (SAPA), argue that tariffs have not increased the price, the evidence in the research paper done for the SA Reserve Bank by Edwards and Stern suggests otherwise.

In the past two decades, consumption of frozen chicken has grown faster than production. Until 2018, imports rose. But in response, SAPA applied to the International Trade Administration Commission (ITAC), which advises the minister of Trade, Industry and Competition, for increased tariffs in various forms. This had several effects: firstly, the source of frozen chicken shifted to alternative non-dutiable jurisdictions with which South Africa had free trade agreements. Secondly, trade protection measures resulted in a general price increase of frozen chicken across a number of outlets surveyed by the authors. Import volumes decreased to levels last seen a decade ago, and there was a massive rise in the tariff on frozen chicken from around 9% in 2012 to 53% in 2021.

Thirdly, the impact on poorer consumers has been largely negative. It is consumers – and importers – who have borne the costs of the tariff increases, rather than exporters absorbing some of the increase by lowering costs.

Moreover, if the country is in a preferential trade agreement with a large industrial region, such as the European Union, the effectiveness of tariffs as an industrial policy instrument is reduced. This is because importers simply shift their preference to these regions. This also results in lower revenue for government.

Perhaps most importantly, consumers bear a significant part of the burden of tariff increases through higher retail prices. In this case, tariffs are estimated to have raised consumer prices of frozen chicken products by around 16% above what they would otherwise have been over the 2012-2021 period.

Poorer households, as the authors point out, spend a large proportion of their income on frozen chicken. The tariffs mean they are spending about 2% more on their food budgets to retain the same level of welfare. ITAC’s aim may be, ostensibly, to protect local producers, but if increased tariffs result in trade diversion and if the price increases are borne by local consumers, the policy may be counter-productive.

In the last edition of Econ3x3, three researchers from the University of Cape Town’s Research Unit on the Economics of Excisable Products (REEP) and the World Health Organization in the region, examined the implications for health – and for government revenue – of the relatively low excise taxes on tobacco products in in Mozambique.

The WHO recommends that the total tax share of tobacco products should be 75% of their retail price. The most important determinants of the demand for cigarettes, write the authors, is people’s incomes and the price. Mozambique’s per-capita income is expected to increase significantly so, unless excise taxes rise by more than this, demand for tobacco products may well increase.

Under the current schedule of expected excise taxes on tobacco, the adult cigarette smoking prevalence rate would increase from 9.8% to 11% between 2022 and 2027. But if the WHO-recommended taxes are imposed, the rate is expected to decline from 9.8% to 9.2%. Moreover, the fiscus would net more revenue.

Their article is a powerful argument for the Mozambican government to reconsider the scheduled cigarette excise tax increases.

Pippa Green, January 18, 2023

Working Papers from the REDI3x3 project are available HERE

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Axel Schimmel-pfennig

Articles

Who pays the price?

READ, WRITE & REASON

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