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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. de Melo, Jaime & Tarr, David, 1990. "Industrial Policy in the Presence of Wage Distortion: The Case of the US Auto and Steel Industries," CEPR Discussion Papers, C.E.P.R. Discussion Papers 435, C.E.P.R. Discussion Papers.
  2. Morris Morkre & David Tarr, 1995. "Reforming Hungarian agricultural trade policy: A quantitative evaluation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 131(1), pages 106-131, March.
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Citations

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Cited by:
  1. Rutherford, Thomas & Tarr, David, 2008. "Regional household and poverty effects of Russia's accession to the world trade organization," Policy Research Working Paper Series, The World Bank 4570, The World Bank.
  2. 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, The World Bank 1872, The World Bank.
  3. Tarr, David G., 2013. "Putting Services and Foreign Direct Investment with Endogenous Productivity Effects in Computable General Equilibrium Models," Handbook of Computable General Equilibrium Modeling, Elsevier, Elsevier.
  4. Jesper Jensen & Thomas Rutherford & David Tarr, 2007. "The Impact of Liberalizing Barriers to Foreign Direct Investment in Services: The Case of Russian Accession to the World Trade Organization," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 11(3), pages 482-506, 08.
  5. Jensen, Jesper & Tarr, David, 2007. "The impact of Kazakhstan accession to the World Trade Organization : a quantitative assessment," Policy Research Working Paper Series, The World Bank 4142, The World Bank.
  6. Rutherford, Thomas & Tarr, David, 2006. "Regional impacts of Russia's accession to the World Trade Organization," Policy Research Working Paper Series, The World Bank 4015, The World Bank.
  7. Light Miles K., 2004. "FTAA and Service Liberalization in Colombia," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  8. Michael Funke & Ralf Ruhwedel, 2004. "Trade, product variety and welfare: A quantitative assessment for the transition economies in Central and Eastern Europe," Macroeconomics, EconWPA 0401016, EconWPA.

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