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Second-Best Foreign Exchange Policy in the Presence of Domestic Price Controls and Export Subsidies

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  • Tarr, David G

Abstract

Poland, like many developing countries, has required its exporters to surrender a share of their foreign exchange earnings to the government at an overvalued exchange rate. During the late 1980s, it progressively increased the share which exporters were allowed to retain (the retention ratio), but other distortions to the trade regime remained. A model developed here estimates the effects of these policies on welfare under different foreign exchange elasticities, export and import subsidies, official exchange rates, and policies on exporter retention of foreign exchange earnings. The retention ratios in effect in early 1989 were equivalent to a 51 percent tax on exports or an import tariff of 130 percent. As economic theory would suggest, maximum social benefit would derive from removal of the full range of distortions. Full retention of foreign exchange by exporters in the absence of other distortions would provide social benefits equivalent to 8 percent of gross domestic product. But the net effect of the other policies together is a bias toward tradables, so that a policy of somewhat less than full retention of foreign exchange is optimal in this second-best world.
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Suggested Citation

  • Tarr, David G, 1990. "Second-Best Foreign Exchange Policy in the Presence of Domestic Price Controls and Export Subsidies," World Bank Economic Review, World Bank Group, vol. 4(2), pages 175-193, May.
  • Handle: RePEc:oup:wbecrv:v:4:y:1990:i:2:p:175-93
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    Cited by:

    1. Michalopoulos, Constantine & Tarr, David, 1991. "Trade and payments arrangements in post-CMEA Eastern and Central Europe," Policy Research Working Paper Series 644, The World Bank.
    2. Anderson, Kym & Kurzweil, Marianne & Martin, Will & Sandri, Damiano & Valenzuela, Ernesto, 2008. "Measuring distortions to agricultural incentives, revisited," World Trade Review, Cambridge University Press, vol. 7(04), pages 675-704, October.
    3. Tarr, David, 1991. "When does rent-seeking augment the benefits of price and trade reform on rationed commodities? : estimates for automobiles and color televisions in Poland," Policy Research Working Paper Series 741, The World Bank.
    4. Kym Anderson & Johan Swinnen, 2008. "Distortions to Agricultural Incentives in Europe's Transition Economies," World Bank Publications, The World Bank, number 6502.
    5. La Ferrara, Eliana & Castillo, Gabriel & Nash, John, 1994. "The reform of mechanisms for foreign exchange allocation : theory and lessons from sub-Saharan Africa," Policy Research Working Paper Series 1268, The World Bank.
    6. Howard J. Shatz & David G. Tarr, 2017. "Exchange Rate Overvaluation and Trade Protection: Lessons from Experience," World Scientific Book Chapters,in: Trade Policies for Development and Transition, chapter 5, pages 115-127 World Scientific Publishing Co. Pte. Ltd..

    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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