Effects of Reducing Tariffs in the Democratic Republic of Congo (DRC): A CGE Analysis

Over the past two and a half decades, the Democratic Republic of Congo (DRC), along with several other developing countries, implemented the Structural Adjustment Program (SAP) proposed by the International Monetary Fund (IMF) and World Bank. Since the 1990s when war broke out in the DRC triggered by the control of natural resources, unemployment and poverty have been on the rise in the country. Despite this, ever since the Government Action Plan for Natural Resource Law Enforcement, Governance and Trade was implemented in 1992, the population blamed the SAP for causing the heightened poverty of the 1990s. However, during the reform period it was difficult to point out which policies had an adverse effect on unemployment, poverty and productivity growth. It is in that context that this paper analyses the effects of reducing tariffs through a Computable General Equilibrium (CGE) model of the DRC. The specific DRC Formal-Informal Model (DRCFIM) is a multi-sectoral computable general equilibrium model that captures the observed structure of the DRC's formal and informal economies, as well as the numerous linkages or transmission channels connecting their various economic agents, such as investors, firms, traders, and the government. The parameters of the CGE equations are calibrated to observed data from a social accounting matrix (SAM). The paper finds that tariff reduction increases formal employment and output but hurts informal producers. It considerably increases the output and employment of the formal sector by raising import competition without providing further opportunities for the informal sector to access foreign export markets. Nonetheless, it induces productivity improvements when local producers survive import competition by seeking importing input-saving technologies and production practices. These findings highlight the importance of differentiating between the formal and informal sector impacts of the DRC's socioeconomic policies. In particular, this study draws the attention of policy makers to a different employment outcome when tariff reduction is taken into consideration. We suggest that the DRC government considers subsidising low income household to avoid widening inequality in the country.