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How Does Trade Openness Influence Budget Deficits in Developing Countries?

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Author Info

  • Jean-Louis Combes
  • Tahsin Saadi-Sedik

Abstract

This paper analyzes the effects of trade openness on budget balances by distinguishing the effects of natural openness from those of trade-policy induced openness. Using the GMMsystem estimator, the econometric analysis focuses on 66 developing countries during 1974-98. The results show that trade openness increases a country''s exposure to external shocks regardless of its underlying causes. This reinforces the adverse effects of terms of trade instability on budget balances. However, trade openness also influences budget balances through several other channels: corruption, income inequalities, etc. The paper shows that these additional effects of natural openness and trade-policy induced openness on budget balances go in opposite directions: the former deteriorates budget balances whereas the latter improves them.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/3.

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Length: 22
Date of creation: 01 Jan 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/3

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Keywords: Trade policy; Developing countries; Budget deficits; Terms of trade; trade openness; budget balances; government revenue; external shocks; public spending; trade shocks; tax base; fiscal policy; fiscal policies; political economy; trade liberalization; trade policy instruments; fiscal performance; fiscal deficits; trade policies; public finances; measure of trade; impact of trade; terms of trade shocks; budget deficit; fiscal administrations; international trade; budget balance; government budget; reducing tariffs; foreign capital; trade restrictions; government spending; budget surplus; tax rates; capital expenditures; fiscal theories; impact of trade liberalization; value of exports; trade regimes; free-rider problem; liberal trade policy; global integration; public finance; trade taxes; commodity prices; fiscal revenues; public debt; export taxes; fiscal affairs; exchange rate regime; exchange rate regimes; liberal trade; income distribution; fiscal systems; fiscal deficit; reduction in tariffs; budget position; trade barriers; fiscal effort; nontariff barriers; open economies; fiscal affairs department; interest groups; rural population; fiscal surplus; government budgets;

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References

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Citations

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Cited by:
  1. Leslie Teo & David Cowen & Hemant Shah & Ranil Salgado & Alessandro Zanello, 2006. "Financial Integration in Asia," IMF Working Papers 06/196, International Monetary Fund.
  2. repec:pdn:wpaper:46 is not listed on IDEAS
  3. Jean-François Brun & Gérard Chambas & Jean-Louis Combes, 2011. "Recettes publiques des pays en développement. Méthode d'évaluation," Working Papers, HAL halshs-00564568, HAL.
  4. Azim M. Sadikov & Hans P. Lankes & Dustin Smith & Katrin Elborgh-Woytek & Jean-Jacques Hallaert, 2006. "Fiscal Implications of Multilateral Tariff Cuts," IMF Working Papers 06/203, International Monetary Fund.
  5. Éva Polgár & Julia Wörz, 2010. "No risk and some fun? Trade and wages in the enlarged European Union," Empirica, Springer, Springer, vol. 37(2), pages 127-163, May.
  6. Christian Ebeke, 2011. "Transferts des migrants, ouverture sur l'extérieur et dépenses publiques dans les pays en développement," Working Papers, HAL halshs-00552983, HAL.
  7. Lis, Eliza M. & Nickel, Christiane, 2009. "The impact of extreme weather events on budget balances and implications for fiscal policy," Working Paper Series, European Central Bank 1055, European Central Bank.
  8. Ricardo Fenochietto & Carola Pessino, 2013. "Understanding Countries’ Tax Effort," IMF Working Papers 13/244, International Monetary Fund.
  9. Jean-Louis Combes & Pascale Combes Motel & Somlanare Romuald KINDA, 2014. "Do Environmental Policies Hurt Trade Performance?," Working Papers, HAL halshs-00939249, HAL.
  10. Christian Ebeke & Dilan Ölcer, 2013. "Fiscal Policy over the Election Cycle in Low-Income Countries," IMF Working Papers 13/153, International Monetary Fund.
  11. Carola Pessino & Ricardo Fenochietto, 2010. "Determining countries’ tax effort," Hacienda Pública Española, IEF, IEF, vol. 195(4), pages 65-87, december.
  12. Christian Hubert Ebeke, 2011. "Remittances, Countercyclicality, Openness and Government Size," Recherches économiques de Louvain, De Boeck Université, De Boeck Université, vol. 77(4), pages 89-114.
  13. Martin Petri & Tahsin Saadi-Sedik, 2006. "To Smooth or Not to Smooth," IMF Working Papers 06/257, International Monetary Fund.
  14. Diallo, Oumar, 2009. "Tortuous road toward countercyclical fiscal policy: Lessons from democratized sub-Saharan Africa," Journal of Policy Modeling, Elsevier, Elsevier, vol. 31(1), pages 36-50.
  15. Foued Chihi & Michel Normandin, 2008. "External and Budget Deficits in Developing Countries," Cahiers de recherche, CIRPEE 0819, CIRPEE.
  16. David A. Grigorian & Hamid Reza Davoodi, 2007. "Tax Potential vs. Tax Effort," IMF Working Papers 07/106, International Monetary Fund.

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