The Value of Export Incentives

(ProQuest: ... denotes formulae omitted.)1. IntroductionDeveloping countries have a long history of providing export incentives to reduce the overall tax burden on export incomes, thereby enabling exporters to lower prices without reducing their net profits. Over the years, such incentives have taken several forms, comprising both tax and nontax incentives. These include tax exemptions, export finance schemes, and other measures to facilitate exporters and exporting. Apart from the rationale for enhancing market incentives to attract investment in the exports sector, there are also political motives for export incentives because of which their impact - in terms of economic distortions - is often ignored.In recent years, export promotion has been the hallmark of most South Asian economies' trade policies. While trade liberalization episodes have generally reduced the anti-export bias, these economies also rely on a variety of direct export measures to facilitate export growth. The overriding principles behind restrictive trade regimes were the protection of domestic industry from foreign competition and the conservation of foreign exchange to support the balance of payments. However, as the South Asian countries transition from development strategies based primarily on import substitution to ones based on export promotion, a number of incentives are being offered to boost exports.The rationale for using export incentives along with the exchange rate includes, first, the depreciation of the exchange rate, which generally increases the profitability of exports, but runs the risk of leading to more domestic inflation as the prices of essential imports rise simultaneously. Second, the incentive effect is limited in the case of export items that have a high import content. Third, export incentives can be more effective in targeting particular exports, especially emerging and value-added exports.Export incentives persist as the main ingredient of trade policy. At the same time, they are not subject to strict evaluation primarily because their cost is less visible than that of other export promotion policies that involve explicit budget outlays. This argument is rarely articulated, but it does undoubtedly contribute to the political attractiveness of tax incentives compared to alternatives with a direct budgetary impact, such as subsidies or infrastructure development for industrial zones and others.Most of the literature on export incentives is linked to the performance of the exports sector and the factors that influence exports. However, the question of competitiveness between different countries' exporting sectors is not addressed in every respect, particularly in the case of developing countries where these incentives act as a "breather" for the exporting sectors. The issue of export incentives becomes more complex when other countries compete for the same export markets by offering a wide range of export incentives, and also because export incentives have a positive impact on exports while causing the government to lose revenue at the same time.The range of export incentives offered in India, Pakistan, and Bangladesh is broad. It includes cash incentives, lower income tax rates, concessional export finance, zero-rating sales tax, exemption from export duties, and others. The principal purpose of this paper is to compare the export or fiscal incentives given to the textile industries across these three countries, given that they are also competitors in the international export market. The analysis does not utilize traditional measures that involve export shares or relative prices; rather, we have formulated a novel methodology based on measures of competitiveness at the level of a single firm or individual exporter. The comparative analysis will reveal the advantages and disadvantages to Pakistan's textile industry and highlight possible measures to address them.2. Export Incentives in Different CountriesTax incentives - exceptions to the general tax regime - can be defined as any incentive that reduces the tax burden of an enterprise to induce it to invest particularly in export-oriented projects or sectors. …