A Firm'S-Eye View of Policy and Fiscal Reforms in Cameroon

Abstract

In Cameroon, neither a major devaluation nor a major simplification of the tax structure systematically affected profit margins. But trade liberalization - substantial tariff reductions - clearly signaled change to manufacturers. And devaluation shifted relative prices dramatically in favor of exportable goods.

After decades of heavy trade restrictions, fiscal distortions, and currency overvaluation, Cameroon implemented important commercial and fiscal policy reforms. Almost simultaneously, a major CFA devaluation cut the international price of Cameroon's currency in half.

Gauthier, Soloaga, and Tybout examine the effects of these reforms on the incentive structure that manufacturing firms face. Did they create a coherent set of new signals? Was the net effect to stimulate the production of tradable goods? Was the dispersion of tax burdens lessened?

They address each of these questions using a cost function decomposition applied to detailed firm-level panel data.

They observe that Cameroon's reforms appear to have sent clear new signals to manufacturers, as the effective rate of protection fell by between 80 and 120 percentage points.

Unlike trade liberalization, neither tax reforms nor the CFA devaluation had a major systematic effect on profit margins. But the CFA devaluation did twist relative prices dramatically in favor of exportable goods, so export-oriented firms exhibited rapid output growth.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to explore conceptual and practical issues in the trade policies of developing countries. The authors may be contacted at [e-mail], [e-mail], or [e-mail].