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Trade Policy, Poverty, and Development in a Dynamic General Equilibrium Model for Zambia

  • Edward F. Buffie

    ()

    (Department of Economics, Indiana University)

  • Manoj Atolia

    ()

    (Department of Economics, Florida State University)

Many LDCs suffer from low levels of private investment, from acute shortages of social and physical infrastructure, and from widespread poverty and underemployment. How can trade policy help combat these problems? Neoclassical trade theory objects that the premise of the question is incorrect. According to the Principle of Targeting, it is better to use other policy instruments to counteract market imperfections and to target social objectives. Instead of interfering with free trade, the government should increase domestic taxes to pay for employment subsidies, investment subsidies, transfers to the poor, and additional public investment in infrastructure. Policy makers reject this advice as impractical. Our objective in this paper is to restart the policy dialogue. We build a dynamic general equilibrium trade model that is rich in structural detail and policy instruments but not a black box. We use the model to investigate how trade policy affects poverty, underemployment, aggregate capital accumulation, and real output in Zambia. The results consistently recommend policy packages that combine an escalated structure of protection with an escalated structure of export promotion. There is no support for the view that free trade or a low uniform tariff is approximately optimal.

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File URL: ftp://econpapers.fsu.edu/RePEc/fsu/wpaper/wp2008_11_04.pdf
File Function: First version, 2008-01
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Paper provided by Department of Economics, Florida State University in its series Working Papers with number wp2008_11_04.

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Length: 43
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:fsu:wpaper:wp2008_11_04
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  1. Masao Ogaki & Jonathan David Ostry & Carmen Reinhart, 1995. "Saving Behavior in Low and Middle-Income Developing Countries; A Comparison," IMF Working Papers 95/3, International Monetary Fund.
  2. Barnett, Steven A. & Sakellaris, Plutarchos, 1998. "Nonlinear response of firm investment to Q:: Testing a model of convex and non-convex adjustment costs1," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 261-288, July.
  3. Blundell, Richard & Pashardes, Panos & Weber, Guglielmo, 1993. "What Do We Learn About Consumer Demand Patterns from Micro Data?," American Economic Review, American Economic Association, vol. 83(3), pages 570-97, June.
  4. Blundell, Richard, 1988. "Consumer Behaviour: Theory and Empirical Evidence--a Survey," Economic Journal, Royal Economic Society, vol. 98(389), pages 16-65, March.
  5. Lofgren, Hans & Thurlow, James & Robinson, Sherman, 2004. "Prospects for growth and poverty reduction i n Zambia, 2001-2015," DSGD discussion papers 11, International Food Policy Research Institute (IFPRI).
  6. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany.
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