Tariff and factor allocation in a small open economy: Nigeria

Abstract

This paper examines the likely impact of import tax reduction and its subsequent elimination on factor re-allocation under alternative exchange rate regimes in Nigeria. The study observed that the patterns of reallocation are quite qualitatively similar under alternative exchange rate regimes. Particular findings suggest that, under both exchange rate regimes, as import tariff is reduced progressively, the services industry loses labour employment to the manufacturing and agricultural sectors while the agricultural sector loses capital to both the manufacturing and service sectors. Under the different exchange rate regimes, the manufacturing sector is a net employer of labour and capital. The study observed that the amount of re-allocation under flexible exchange rate is higher than under a fixed exchange rate regime. Furthermore, labour is observed to be relatively more mobile amongst sectors than capital. However, in general, percentage factor reallocation is considered small as no sector lost significant amount of factor employed to other sectors. These findings indirectly points to the limited role of trade policy in generating employment and enhancing efficiency in production in a small open economy.