Export taxes and sectoral economic growth: Evidence from cotton and yarn markets in Pakistan

Pakistan used an export tax on raw cotton from 1988-1995 in order to suppress the internal price of cotton to benefit the domestic yarn industry. An analysis was conducted to estimate the impact of this policy on both the cotton and yarn sectors. These effects were simulated USing the results of a structural econometric model of these sectors of Pakistan's economy. Results indicated that the export tax had a negative impact on the growth rate in the cotton sector, while having little or no impact on the yarn sector. Thus, the export tax did not achieve its objective of increasing the growth rate of value-added (yarn) production above what would have occurred naturally.