TRADE FACILITATION AND FIRMS EXPORTS:

THE CASE OF EGYPT

Rana Hendy and Chahir Zaki

ERF Policy Seminar

March 21, 2014

Cairo- Egypt

Motivation• Numerous studies have highlighted MENA’s weak performance

in aggregate trade and diversification (Dogruel and Tekce, 2011).

• Yet, little is known about the impact of administrative barriers on firm-level exporter behavior largely because of a lack of data.

• This paper tackles the impact of red tape barriers on firms’ exports.

Motivation

The topic of this paper is crucial in international trade for three main reasons:

1. First, trade barriers- as argued by the WTO- are highly correlated to lengthy, bureaucratic and time consuming trade procedures that do negatively affect firms’ exports.

2. Second, these barriers are significantly highly persistent and costly in developing countries such as Egypt.

3. Third, they represent a deadweight loss as they do not generate any rent or revenue.

MENA versus the Rest of the World

Red Tape Barriers vs. Tariffs

Source: Zaki (2013)

Egypt versus MENA and OECD

Trading Across Borders

Literature• Dennis and Ben Shepherd (2011) showed that a 10%

improvement in trade facilitation is associated with product diversity gains of the order of 3%- 4%.

• In Asia, Li and Wilson (2009) found that improvement in trade facilitation indicators tend to increase the probability that Small and Medium Enterprises (SMEs) will become exporter as well as their export propensity.

Literature • In Africa, Yoshino (2008) found that public infrastructure

constraints, such as customs delays, seem to have immediate impacts on regional exports in general, implying the relevance of addressing behind-the-border constraints in fostering regional integration.

• In the same line, Hoekstra (2013) found that trade facilitation can increase African firms’ probability to participate in international trade.

• Shepherd (2012) proved that licensing times do matter for the ability of firms to access imported intermediates.

What we do• We estimate a gravity model using Egyptian firm-level

customs data, for the first time, to examine the impact of these barriers on firms’ exports.

• These data are merged with administrative barriers that come from the Doing Business dataset developed by the World Bank.

• We examine this effect for both the intensive margin (the value of exports) and the extensive one (the probability of exporting a product to a new destination).

Outline Stylized Facts

Methodology

Data

Empirical Results

Policy Implications

Outline Stylized Facts

Methodology

Data

Empirical Results

Policy Implications

Proceeds of Merchandise Exports by Degree of Processing

FY06 FY07 FY08 FY09 FY100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Others

Finished goods

Semi-finished goods

Raw Materials

Fuel, Mineral Oils & Products

Geographical Distribution of Exports

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Others

Australia

Africa

Asia

Arab

USA

Russian Federation

Other European

EU

Exports and Number of Firms

Source: Constructed by the authors using the customs dataset.

2006 2007 2008 2009 20100.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

17,000

18,000

19,000

20,000

21,000

22,000

23,000

24,000

Sum of Export (in billion - LHS) Number of Firms (RHS)

Firms Entry and Exit

2007 2008 2009 20100

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

New Entrants Continuing Firms

Number and mean size of importers0

24

68

Ln

(Nu

mbe

r o

f F

irm

s p

er

dest.)

15 20 25 30Ln(GDP of Importer)

lnumfirm Fitted values

Egypt’s top importers (2006-2010)

2006 2007 2008 2009 2010

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0% CHN

JOR

CHE

NLD

LBN

TUR

FRA

SDN

ESP

ARE

LBY

IRL

SYR

SAU

ITA

USA

Firms per destination

2006 2007 2008 2009 20100

500

1000

1500

2000

2500

USAITASAUSYRIRL

New Exporters (by year)

Average Time to Import of Top Destinations

USA (2)

NLD (11)

CHE (15)

ARE (7)

ESP (10)

IRL (4)

FRA (8)

SAU (1)

ITA (3)

Egypt

TUR (6)

JOR (14)

CHN (13)

SYR (5)

LBN (12)

SDN (9)

0 10 20 30 40 50 60 70

Exports and Time to Import of Top Destinations

0 10 20 30 40 50 60 700

500

1000

1500

2000

2500

3000

3500

f(x) = − 17.224751951054 x + 1558.54940738219

Time to Import of Destination

Ex

po

rts

(th

ou

sa

nd

s)

Outline Stylized Facts

Methodology

Data

Empirical Results

Policy Implications

Methodology• We estimate a gravity model to determine the effect of red tap

barriers on Egyptian exports.

• We control for the following variables: • GDP (for Egypt and the destination)• Gravitational Variables: common language, contiguity,

distance, common colonizer.• Trade Facilitation Variables: time to import, time to export.• Policy Variables: tariffs.

Different Definitions

Outline Stylized Facts

Methodology

Data

Empirical Results

Policy Implications

Data Sources• Firm level customs data come from the General Organization

for Export and Import Control (GOEIC), the Ministry of Industry and Foreign Trade in Egypt from 2006 to 2010 (at the HS4 level).

• Red tape variable (the logarithm of the time to export multiplied by the log of time to import) are taken from the Doing Business database constructed by the World Bank → To have a bilateral variable.

Data Sources• The Gross Domestic Product (GDP) for each country comes

from the World Development Indicators database.

• Other classic gravitational variables, for instance contiguity, common language, distance, common colonizer, etc. come from the Centre des Etudes Prospectives et d’Information Internationales (CEPII) Distance database.

Outline Stylized Facts

Methodology

Data

Empirical Results

Policy Implications

Major Findings (1/2)• Time to export and time to import have a statistically significant

impact on the probability of exporting across different destinations.

Major Findings (2/2)• We disentangle the incidence of administrative barriers on

exporter by their size:Small exporters (<10% or <25%) are more negatively

affected by these barriers than larger firms (>90%).

Small and medium enterprises (SMEs) gain much more from trade facilitation than large multinational ones. These gains are amplified while taking into account the fact that the vast majority of firms in developing countries are small and medium ones and that these companies create more jobs (National Board of Trade, 2003)

To sum up• Red tape barriers negatively affect Egyptian firms.

• This effect seems to be robust for both the intensive margin (the

value of exports) and the extensive one (the probability of exporting across different destinations).

Outline• Stylized Facts

• Methodology

• Data

• Empirical Results

• Policy Implications

Policy Implications of this study• The majority of gains are reaped by Sub-Saharan Africa and

Middle East and North Africa as the exports of electronics, in machinery, metallic products, and textiles and garments are highly boosted (finding in line with Zaki, 2013).

• Policies that lower trade costs and favor access to export markets are likely to increase the number of destinations served by new exporters.

In a general equilibrium framework, more destinations mean more exports, more production and consequently a higher labor demand. This would in turn be beneficial for productivity and job creation, since exporters perform better.

Policy Implications of this study• Red tape barriers may explain why the MENA region is

underperforming in terms of exports performance.

Improving customs authorities by reducing redundant trade procedures: Single window policies Provide support for SMEs through exports clusters. Computerization of Egyptian customs to speed up clearance

time and reduce corruption (already implemented in some Egyptian ports but still needs to be generalized).

Thanks for your attention!