Khondker, Bazlul Haque (1996) Analysis of tariff and tax policies in Bangladesh : a computable general equilibrium approach. PhD thesis, University of Warwick.

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Abstract

The prime objectives of the study are to analyse the effects of tax and tariff policies in
Bangladesh. Toward this end, different variants of computable general equilibrium
models are developed and used to assess the distributional consequence of tax reform
and to examine the resource allocation and income distribution effects of tariff
liberalisation within the paradigm of both 'traditional' and 'new' trade theories.
A computable general equilibrium model of the Bangladesh economy is developed to
assess the distributional consequences of the indirect tax reform which involves the
introduction of a value added tax system. The model captures specific features of a
consumption-type and destination principle-based value added tax system which has
been adopted in Bangladesh. An alternative model of the Bangladesh economy is
also developed to analyse the effects of tariff liberalisation on resource allocation and
income distribution under both competitive and non-competitive assumptions. The
model explicitly incorporates 'market structure' variables such as marginal costs, the
number of domestic firms, the excess profit condition, the market demand elasticities
for domestic firms and increasing returns to scale.
The models are static in nature and are calibrated to a 1988/89 data set compiled
within the framework of a social accounting matrix (SAM). The social accounting
matrix integrates different data sources and the input-output table to depict the major
macroeconomic relations and provides a consistent macroeconomic data set for policy
modelling. Such a framework is particularly useful for a country such as Bangladesh
with sparse and conflicting data sources. The SAM is an attractive framework for
locating inconsistencies and for resolving them in best the possible ways.
The incidence effects of the indirect tax system under pre-VAT and VAT systems are
based on two approaches: a simple approach and a computable general equilibrium
approach.
Two sets of policy experiments are carried out. First, excise duties of domestic
production activities and sales taxes on imports are replaced by a revenue-neutral
single rate of value-added tax. In the second experiment, the VAT system is extended
to the service sector with a revenue-neutral VAT rate. The results of policy
experiments indicate that because of exemptions on subsistence agricultural products,
and because of the progressive structure of the tariffs, the overall indirect tax system
would remain progressive even after the introduction of a single rate VAT. However,
the overall indirect tax incidence appears to be less progressive under the VAT system
compared with the pre-VAT system.
The effects of tariff liberalisation on resource allocation and income distribution are
also examined in this study. It is observed that the results of tariff liberalisation are
sensitive to the way the model is specified. It is also observed that in the competitive
and constant returns to scale model variant, resources move from the heavily protected
sector to the less protected sectors as a result of tariff liberalisation. In contrast, the
heavily protected manufacturing sectors turn out to be the main beneficiary of
liberalisation when imperfect competition is introduced. Expansion of manufacturing
output appears to come from the pro-competitive effects of tariff liberalisation. On
the other hand, almost all the manufacturing sectors show much larger output growth
with the incorporation of increasing returns to scale. The larger expansion of output
of manufacturing sectors is due to a reduction in unrealised scale economies. The
income distribution effects of tariff liberalisation are captured through the changes in
income levels of the six household groups and changes in factor income and factor returns. The redistribution of income under liberalisation appears to favour the low
income household groups. However, it appears that the relative progressivity and
regressivity in the distribution of household income depend on the relative changes of
capital and labour income.
The association between market structure variables and profitability in the
manufacturing sector of Bangladesh is also analysed in this study. This exercise
provides some evidence on the association between industrial structure and
profitability and assesses the importance of foreign and domestic factors on industry
profitability. Two alternative measures of concentration namely concentration ratio
and Hirschman-Herfindahl index and two foreign competition variables such as
import shares and effective tariff rates are used to examine this association. The
results of this exercise indicate that profitability is significantly related to
concentration levels in the manufacturing sector of Bangladesh. It also reports that
foreign competition variables play a significant role in affecting profitability in
domestic industries. It is observed that the profitability is higher in those industries
where concentration levels are high and import shares are low and effective tariff rates
are high.

Item Type:	Thesis (PhD)
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HJ Public Finance
Library of Congress Subject Headings (LCSH):	Tariff -- Bangladesh, Taxation -- Bangladesh, Bangladesh -- Economic policy, Bangladesh -- Econometric models
Official Date:	August 1996
Dates:	Date Event August 1996 Submitted
Institution:	University of Warwick
Theses Department:	Department of Economics
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Round, Jeffery I. (Jeffery Ian), 1943- ; Collie, David R.
Sponsors:	Association of Commonwealth Universities ; University of Warwick. Dept. of Economics
Extent:	xix, 227 leaves
Language:	eng

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