Firms'responses to relative price changes in Cote d'Ivoire : the implications for export subsidies and devaluations

Since the early 1980s, export subsidies have been proposed as a way to counteract the adverse effects of an exchange rate overvaluation among member countries of the West African Monetary Union. It was felt that one way to alter the relative price of traded to nontraded goods was to attempt to mimic devaluation by raising import tariffs and export subsidies by the same proportion. This paper models the short-run response of firms to exogenous changes in export and import prices, taking into account the possibility that firms may sell to both domestic and foreign markets. The results suggest that firms in Cote d'Ivoire do sell more to the foreign market when it is more profitable to do so. Exports respond positively to increases in export prices and negatively to increases in import prices. But the fact that exports would be lower if an export subsidy were combined with an import tariff is not an argument for introducing an export subsidy alone because it would be insufficient to increase output in the tradable goods sector. The combination of an export subsidy with an import tariff, which comes closer to mimicking the effects of devaluation, would serve to counteract some of the adverse effects on output of an overvalued exchange rate.