The Theory of the Second Best implies that any country with less-than-ideal resources can lose from international trade. Recently it has been suggested this means the South (poor countries) are better off suppressing trade with the North, especially trade in natural resource products, since the North has better developed rights to protect its natural resources. Here we show that the suppression of such trade may also impede the development of property rights in the South, but that even taking this into account, trade liberalization need not improve Southern welfare. We find that within a cone of world prices on the boundary of which lies the South’s autarky price vector, welfare losses still occur even when local governments in the South make optimal choices to enclose the hinterlands. Corollary to the losses, the South can gain from tariffs or quotas and, within a proper subset of the cone of loss, can suffer when the prices of its exports rise.
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Paper provided by Resources For the Future in its series Discussion Papers with number
dp-02-30.
Find related papers by JEL classification: F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General F10 - International Economics - - Trade - - - General F18 - International Economics - - Trade - - - Trade and Environment K11 - Law and Economics - - Basic Areas of Law - - - Property Law O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
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