Trade Policy in Developing Countries

Cover......Page 1
Half-title......Page 3
Title......Page 5
Copyright......Page 6
Contents......Page 7
CHAPTER 1 Introduction......Page 9
1.1 Overview of the Book......Page 12
2.1 Duality Theory and Supply......Page 16
2.1.1 The Cost Function......Page 17
2.1.1.1 INPUT DEMANDS AND FACTOR SUBSTITUTION PATTERNS......Page 18
2.1.2 The Revenue or GNP Function......Page 21
2.1.2.1 MODIFYING THE REVENUE FUNCTION TO ALLOW FOR DISTORTIONS......Page 23
2.2 Duality Theory, Welfare, and Demand......Page 24
2.2.1 The Indirect Utility Function......Page 25
2.2.2 The Expenditure Function......Page 26
2.2.2.1 HOMOTHETIC PREFERENCES AGGREGATION, AND WELFARE......Page 27
2.2.3 The Indirect Utility Function and the Expenditure Function for the CES–CRRA Utility Function......Page 30
2.3 Examples......Page 33
Solution......Page 36
3.1 A Quick Overview of LDC Trade Policy......Page 38
3.2.1 The Principle of Targeting......Page 42
3.2.2.1 ADMINISTRATIVE COSTS......Page 46
Underemployment and the Optimal Tariff vs. the Optimal Employment Subsidy......Page 47
A. Calibration of the Model......Page 50
B. Numerical Solutions......Page 52
3.2.2.2 ENDOGENOUS VS. EXOGENOUS DISTORTIONS......Page 56
Comparisons of the Optimal Tariff and the Optimal Employment Subsidy......Page 61
A. Numerical Solutions......Page 65
Further Considerations......Page 68
3.2.3 Is Free Trade Always First-Best?......Page 69
3.3.1 The Infant Industry Argument......Page 70
3.3.1.1 THE EMPIRICAL EVIDENCE......Page 72
3.3.2 Factor Market Distortions......Page 73
3.3.2.1 UNEMPLOYMENT UNDEREMPLOYMENT AND THE FORMAL SECTOR WAGE PREMIUM......Page 74
3.3.2.2 CAPITAL MARKET DISTORTIONS......Page 76
3.3.2.3 PROTECTION REAL WAGES AND UNDEREMPLOYMENT: THE CONVENTIONAL WISDOM......Page 77
3.3.3 Scale Economies and Procompetitive Effects......Page 80
3.3.3.1 A SIMPLE GENERAL EQUILIBRIUM MODEL OF PROTECTION AND IMPERFECT COMPETITION......Page 81
No Entry......Page 83
Free Entry......Page 85
3.3.3.2 OTHER SCENARIOS......Page 88
3.3.3.3 THE EMPIRICAL EVIDENCE......Page 89
3.3.4.1 PROTECTION X-EFFICIENCY AND THE QUIET LIFE......Page 91
3.3.4.2 IMPORT BOTTLENECKS......Page 93
3.3.4.3 TECHNOLOGY TRANSFER AND TRADE......Page 94
3.3.4.4 ENDOGENOUS GROWTH MODELS OF TRADE AND RESEARCH AND DEVELOPMENT......Page 95
3.3.4.5 THE EMPIRICAL EVIDENCE......Page 99
3.4 Concluding Observations......Page 104
4.1 Linear Differential Equations......Page 106
4.1.1 Constructing Phase Diagrams......Page 108
4.1.2 Saddlepoint Dynamics: Obtaining Explicit Solutions......Page 112
4.1.3 Higher Order Systems......Page 115
4.1.3.1 PHASE DIAGRAMS IN SYSTEMS WITH TWO STATE VARIABLES......Page 116
The Method of Eigenvector Rays......Page 117
Dixit’s Trick......Page 119
4.2 Dynamic Optimization......Page 121
4.3 An Extended Example......Page 124
Solution......Page 126
CHAPTER 5 Underemployment, Underinvestment, and Optimal Trade Policy......Page 132
5.1.1 Goods and Factor Prices......Page 133
5.1.2 Technology and Factor Demands......Page 136
2.1.3 Consumption,Investment, and Capital Accumulation......Page 137
5.1.4 The Government Budget Constraint......Page 138
5.2 A Sketch of the General Solution Procedure......Page 139
5.2.1 The Private Agent’s Optimization Problem......Page 140
5.2.2 The Steady-State Equilibrium......Page 141
5.2.3 Pinning Down the Transition Path......Page 142
5.2.4 The Welfare Outcome and Optimal Policy......Page 149
5.2.5 Iteration and the Criterion for Convergence to the Optimum......Page 150
5.3 Calibration of the Model......Page 151
5.3.1 Choice of Parameter Values......Page 155
5.4 The Impact of Small Policy Changes at Free Trade......Page 165
5.4.1 Long-Run Effects on Capital Accumulation, High-Wage Employment, and Real Output......Page 166
5.4.3 Real Wages and Underemployment......Page 169
5.4.3.1 THE TRANSITIONAL DYNAMICS......Page 173
5.4.4 Protection Plus Export Promotion......Page 176
5.5 The Optimal Structure of Protection......Page 178
5.6 The Full Optimal Solution......Page 184
5.7 Incorporating Distributional/Poverty-Reduction Objectives into the Social Welfare Function......Page 188
5.8 Further Remarks on the Nature of Optimal Trade Policy......Page 191
5.9 Concluding Observations......Page 192
CHAPTER 6 Liberalization and the Transition Problem, Part I: Transitory Unemployment......Page 195
6.1 The Problem of Transitory High Unemployment......Page 196
6.2 Compensated Devaluation, Wage Rigidity, and Unemployment......Page 201
6.2.1 The Short-Run Effect on Sectoral Employment......Page 203
6.2.2 The Transition Path......Page 205
6.2.3 Short-Run vs. Long-Run Effects on the Balance of Payments......Page 209
6.2.3.1 SOCIAL SAFETY NETS AND THE TRADE BALANCE......Page 214
6.2.4 Credibility and Transitory Unemployment......Page 219
6.2.5 The Welfare Costs of Transitory Unemployment......Page 220
6.2.5.1 THE OPTIMAL EX ANTE TARIFF VS. THE OPTIMAL STOPPING POINT......Page 222
6.3 Liberalization via Increased Quotas......Page 225
6.3.1 Larger Quotas for Imports of Intermediates in the Export Sector......Page 230
6.3.2 Larger Quotas for Imports of Intermediates in the Industrial Sector......Page 232
6.3.3 Foreign Exchange Auctions and Liberalization......Page 236
6.4 Concluding Observations......Page 238
CHAPTER 7 Tools and Tricks of the Trade, Part III: The Dynamics of Temporary Shocks......Page 241
7.1 The General Methodology......Page 242
Solution......Page 245
CHAPTER 8 Liberalization and the Transition Problem, Part II: Credibility and the Balance of Payments......Page 251
8.1 Temporary Liberalization and the Saving Distortion......Page 252
8.2 A More General Analysis of Temporary Liberalization......Page 255
8.2.1 The Optimal Policy Rule......Page 257
8.2.2 Model Calibration......Page 262
8.2.3 Numerical Solutions......Page 265
8.2.4 Temporary Quota Liberalization......Page 268
8.3 Payments Deficits, Multiple Equilibria, and Self-Fulfilling Failures......Page 269
8.3.1 The Model......Page 271
8.3.2 Sustained Liberalization......Page 273
8.3.3 Temporary Liberalization and Self-Fulfilling Failures......Page 275
8.3.4 Some Numerical Solutions......Page 280
8.3.4.1 RESERVE CUSHIONS AND UNIQUENESS: THE PRICE OF PURCHASING CREDIBILITY......Page 282
8.3.5 The Outcome under an Open Capital Account......Page 286
8.4 Fiscal Deficits, Payments Deficits, and Credibility......Page 289
8.4.1 Weak Credibility May Itself Be the Cause of Fiscal Deficits......Page 291
8.4.2 Inadequate Fiscal Adjustment Disguised as Fiscal Surpluses......Page 294
8.5 Concluding Observations on the General Nature of the Transition Problem......Page 299
CHAPTER 9 Direct Foreign Investment, Economic Development, and Welfare......Page 301
9.1 The Benchmark Model: Plain Vanilla Foreign Investment......Page 303
9.1.1 The Transition Paths for Investment and the Capital Stock......Page 306
9.1.2 The Steady-State Equilibrium......Page 312
9.1.3 Model Calibration......Page 314
9.2 Plain Vanilla Foreign Investment in the Domestic Manufacturing Sector......Page 315
9.2.1 Short-vs. Long-Run Effects on Underemployment......Page 316
9.2.2 The Dynamics of Domestic Capital Accumulation......Page 318
9.2.3 Welfare......Page 320
9.3 Plain Vanilla FI in an Enclave......Page 322
9.3.1 The Adjustment Process and Domestic Welfare......Page 324
9.4 Plain Vanilla FI in the Primary Export Sector......Page 331
9.5 Export Requirements......Page 333
9.5.1 Long-Run Effects on Capital Accumulation and Underemployment......Page 336
9.5.3 Welfare......Page 338
9.6 Joint Ventures......Page 339
9.6.1 Joint Ventures in the Domestic Manufacturing Sector......Page 342
9.6.1.1 THE STEADY-STATE OUTCOME......Page 343
Domestic and Foreign Technology are Equally Labor Intensive…......Page 344
Same Output–Capital Ratio at Domestic and Foreign Plants…......Page 345
Foreign Technology Is More Labor-Intensive…......Page 347
9.6.1.2 THE TRANSITION PATH......Page 348
9.6.2 Joint Ventures in an Export Enclave......Page 350
9.7 Technology Transfer......Page 365
9.7.1 Welfare......Page 368
9.8 Allowing for Capital Accumulation in Other Sectors......Page 371
9.9 Summary and Guidelines for Policy......Page 374
Appendix......Page 376
Optimal Commercial Policy......Page 378
Liberalization......Page 379
Direct Foreign Investment......Page 380
References......Page 382
Index......Page 403