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Trade and Growth in the Presence of Distortions

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  • Stephen Tokarick
  • James H Cassing

Abstract

Tariffs and other policy distortions typically lower real national income relative to what it otherwise would have been for any given rate of factor accumulation. Even while lowering real income, however, policy distortions may raise an economy''s real measured growth rate and so, somewhat deceivingly, give the impression that national welfare has benefited from things like tariff protection. This would be an incorrect conclusion. This paper discusses the issue of how protection can affect the rate of growth for a small, open economy. As shown by Johnson (1970), in the presence of exogenously given factor accumulation, tariffs either raise or lower an economy''s growth rate (measured by the change in the value of output at world prices), relative to the no-distortion growth rate. We also discuss the relevance of this result for tariff uniformity, "tariff jumping" foreign direct investment, and the empirical literature on trade and growth. Finally we use a numerical simulation model of Egypt to assess whether the costs of its tax distortions have increased or declined over time.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/12.

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Length: 32
Date of creation: 01 Jan 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/12

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Keywords: Trade; Economic growth; Capital accumulation; National income accounts; Economic models; growth rate; factor accumulation; national income; world prices; growth rates; tariff rate; import tariff; elasticity of substitution; equilibrium model; tariff levels; open economy; terms of trade; tariff protection; international trade; import-competing sector; domestic distortions; export sector; factor shares; tariff change; world price; trade theory; factor price; tariff revenue; indirect tax; per capita income; imported good; factor endowments; constant elasticity of substitution; global trade; political economy; import duties; zero profits; perfect substitutes; world output; trade regimes; real economic growth rate; reciprocal dumping; global trade analysis; trade models; tariff increases; foreign trade; aggregate demand; economic growth rate; growth accounting; trade reform; commodity prices; imported goods; global integration; trade liberalization; trade effects; import protection; export taxes; tariff rates; intermediate inputs; zero tariff; tariff structure; distortionary taxes; tariff barrier; gdp growth; trade barriers; indirect taxes; import duty; income losses; import tariffs; trade protection; domestic demand; import sector; real economic growth;

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  1. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
  2. Ann Harrison, 1995. "Openness and Growth: A Time-Series, Cross-Country Analysis for Developing Countries," NBER Working Papers 5221, National Bureau of Economic Research, Inc.
  3. Michael A. Clemens & Jeffrey G. Williamson, 2001. "A Tariff-Growth Paradox? Protection's Impact the World Around 1875-1997," NBER Working Papers 8459, National Bureau of Economic Research, Inc.
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  7. Cassing, James H., 1983. "A note on growth in the presence of tariffs," Journal of International Economics, Elsevier, vol. 14(1-2), pages 115-121, February.
  8. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-83, May.
  9. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, December.
  10. Robert E. Baldwin, 2003. "Openness and Growth: What's the Empirical Relationship?," NBER Working Papers 9578, National Bureau of Economic Research, Inc.
  11. Young, Alwyn, 1995. "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 641-80, August.
  12. Andrew Berg & Anne O. Krueger, 2003. "Trade, Growth, and Poverty," IMF Working Papers 03/30, International Monetary Fund.
  13. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  14. Lofgren, Hans & El-Said, Moataz, 1999. "A general equilibrium analysis of alternative scenarios for food subsidy reform in Egypt:," TMD discussion papers 48, International Food Policy Research Institute (IFPRI).
  15. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
  16. Ann Harrison & Gordon Hanson, 1999. "Who Gains from Trade Reform? Some Remaining Puzzles," NBER Working Papers 6915, National Bureau of Economic Research, Inc.
  17. Dawkins, Christina & Srinivasan, T.N. & Whalley, John, 2001. "Calibration," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 58, pages 3653-3703 Elsevier.
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