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Trade liberalization and endogenous growth in a small open economy : a quantitative assessment

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  • Rutherford, Thomas F.
  • Tarr, David G.

Abstract

The authors develop a numerical endogenous growth model approximating an infinite horizon, which allows them to investigate the relationship between trade liberalization and economic growth. Economic theory generally implies that trade liberalization will improve economic growth, and the two phenomena are positively correlated in empirical tests, but the connection is not well-substantiated in numerical general equilibrium models. In the authors'model, an intermediate input affects aggregate output through a Dixit-Stiglitz function. Additional varieties provide the engine of growth in this framework and the existence of this mechanism magnifies the welfare costs. In this model with lump sum revenue replacement, reducing a tariff from 20 percent to 10 percent produces a welfare increase (in terms of Hicksian equivalent variation over the infinite horizon) of 10.7 percent of the present value of consumption in their central model, where the economy is assumed to be unable to borrow on international financial markets. If macroeconomic and financial reforms are in place that would allow international borrowing, however, the same tariff cut is estimated to result in a 37 percent increase in Hicksian equivalent variation. On the other hand, if inefficient replacement taxes must be used in an economy without the capacity to borrow internationally, the gains would be reduced to 4.7 percent. Larger tariff cuts--typical of those in many developing countries over the past 30 years--produce larger estimated welfare gains at least proportionate to the size of the cut. The authors apply the model to five developing countries and estimate the impact of the tariff changes those countries plan to undertake as part of Uruguay Round commitments. Because of the dynamic effects, estimated gains are considerably larger than those found in the literature on the impact of the Uruguay Round.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1970.

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Date of creation: 30 Sep 1998
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Handle: RePEc:wbk:wbrwps:1970

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Keywords: International Terrorism&Counterterrorism; Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Labor Policies; Inequality; Economic Theory&Research; Environmental Economics&Policies; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Trade and Regional Integration;

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References

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  1. Keller, W., 1996. "Trade and the Transmission of Technology," Working papers 9620, Wisconsin Madison - Social Systems.
  2. Jean Mercenier & Philippe Michel, 1995. "Temporal aggregation in a multi-sector economy with endogenous growth," Working Papers 554, Federal Reserve Bank of Minneapolis.
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  4. Melo, J. de & Tarr, D., 1993. "Industrial Policy in the Presence of Wage Distorsions: The Case of the US Auto and Steel Industries," Research Papers by the Department of Economics, University of Geneva 93.17, Département des Sciences Économiques, Université de Genève.
  5. Richard E. Baldwin & Joseph F. Francois & Richard Portes, 1997. "The costs and benefits of eastern enlargement: the impact on the EU and central Europe," Economic Policy, CEPR & CES & MSH, vol. 12(24), pages 125-176, 04.
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  12. Harrison, Glenn W & Rutherford, Thomas F & Tarr, David G, 1993. "Trade Reform in the Partially Liberalized Economy of Turkey," World Bank Economic Review, World Bank Group, vol. 7(2), pages 191-217, May.
  13. de Melo, Jaime & Tarr, David, 1990. "Welfare Costs of US Quotas in Textiles, Steel and Autos," CEPR Discussion Papers 401, C.E.P.R. Discussion Papers.
  14. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
  15. Harrison, Glenn W. & Rutherford, Thomas F. & Tarr, David G., 1996. "Economic implications for Turkey of a customs union with the European Union," Policy Research Working Paper Series 1599, The World Bank.
  16. Harrison, Glenn W. & Jones, Richard & Kimbell, Larry J. & Wigle, Randal, 1993. "How robust is applied general equilibrium analysis?," Journal of Policy Modeling, Elsevier, vol. 15(1), pages 99-115, February.
  17. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  18. Thomas F. Rutherford & David G. Tarr, 2003. "Regional Trading Arrangements for Chile: do the Results Differ with a Dynamic Model?," Economie Internationale, CEPII research center, issue 94-95, pages 261-281.
  19. Dani Rodrik, 1992. "The Limits of Trade Policy Reform in Developing Countries," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 87-105, Winter.
  20. Harrison, Glenn W & Rutherford, Thomas F & Tarr, David G, 1997. "Quantifying the Uruguay Round," Economic Journal, Royal Economic Society, vol. 107(444), pages 1405-30, September.
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Citations

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Cited by:
  1. Bakoup, Ferdinand & Tarr, David, 1998. "How integration into the Central African Economic and Monetary Community affects Cameroon's economy: general equilibrium estimates," Policy Research Working Paper Series 1872, The World Bank.
  2. Michael Funke & Ralf Ruhwedel, 2004. "Trade, product variety and welfare: A quantitative assessment for the transition economies in Central and Eastern Europe," Macroeconomics 0401016, EconWPA.
  3. Rutherford, Thomas & Tarr, David, 2006. "Regional impacts of Russia's accession to the World Trade Organization," Policy Research Working Paper Series 4015, The World Bank.
  4. Light Miles K., 2004. "FTAA and Service Liberalization in Colombia," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  5. Jensen, Jesper & Tarr, David, 2007. "The impact of Kazakhstan accession to the World Trade Organization : a quantitative assessment," Policy Research Working Paper Series 4142, The World Bank.
  6. Jensen, Jesper & Rutherford, Thomas & Tarr, David, 2004. "The impact of liberalizing barriers to foreign direct investment in services - the case of Russian accession to the World Trade Organization," Policy Research Working Paper Series 3391, The World Bank.
  7. Rutherford, Thomas & Tarr, David, 2008. "Regional household and poverty effects of Russia's accession to the world trade organization," Policy Research Working Paper Series 4570, The World Bank.

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