This paper explains why trade liberalizations occur in developing countries, and why they are often reversed. It does so by focusing on the use of lobbying for protection by import competing firms as a means to postpone costly product quality upgrades to keep up with foreign competitors. Given the availability of a political market for import tariffs, domestic firms will lobby for a sequence of tariffs that insulate domestic profits from a widening quality gap, thereby allowing adjustment to be postponed. But as the contributions required by the government grow with the size of the quality gap, it will be optimal to adjust quality and to decrease the lobbying effort at some time, leading to liberalization and technological catch-up. But then the equilibrium tariff will again be small and "cheap", and it will pay to start lobbying anew, until the next quality adjustment. Therefore, cycles in protection will occur as a result of the use of lobbying as a substitute for innovation. The model thus sheds new light on the impact of the costs of protection on the effectiveness of the lobbying effort over time, and on their implications for the timing and the time horizon of trade reforms in developing countries.
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number
272.
Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Grossman, Gene M & Helpman, Elhanan, 1994.
"Protection for Sale,"
American Economic Review,
American Economic Association, vol. 84(4), pages 833-50, September.
[Downloadable!] (restricted)
Other versions:
Gene M. Grossman & Elhanan Helpman, 1992.
"Protection For Sale,"
NBER Working Papers
4149, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
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