According to the Washington Consensus, developing countries’ growth would benefit from a reduction in tariffs and other barriers to trade. But a backlash against this view now suggests that trade policies have little or no impact on growth. If "getting policies right" is wrong or infeasible, this leaves only the more tenuous objective of "getting institutions right" (Easterly 2005, Rodrik 2006). However, the empirical basis for judging recent trade reforms is weak. Econometrics are mostly ad hoc; results are typically not judged against models; trade policies are poorly measured (or not measured at all, as when trade volumes are spuriously used); and the most influential studies in the literature are based on pre-1990 experience (which predates the "Great Liberalization" in developing countries which followed the GATT Uruguay Round). We address all of these concerns - by using a model-based analysis which highlights tariffs on capital and intermediate goods; by compiling new disaggregated tariff measures to empirically test the model; and by employing a treatment-and-control empirical analysis of pre- versus post-1990 performance of liberalizing and nonliberalizing countries. We find evidence that a specific treatment, liberalizing tariffs on imported capital and intermediate goods, did lead to faster GDP growth, and by a margin consistent with theory (about 1 percentage point per annum). Endogeneity problems are considered and other observations are consistent with the proposed mechanism: changes to other tariffs, e.g. on consumption goods, though collinear with general tariffs reforms, are more weakly correlated with growth outcomes; and the treatment and control groups display different behavior of investment prices and quantities, and capital flows.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
6942.
Find related papers by JEL classification: E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes F10 - International Economics - - Trade - - - General F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies F53 - International Economics - - International Relations and International Political Economy - - - International Agreements and Observance; International Organizations N10 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - General, International, or Comparative N70 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - General, International, or Comparative O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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