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Trade Policy Determinants and Trade Reform in a Developing Country: The Case of Colombia

  • Baybars Karacaovali

    (Department of Economics, University of Hawaii at Manoa)

In this paper, I start out with a standard political economy of trade policy model to guide the subsequent estimation of the determinants of trade policy in a developing country. I carefully test the model with Colombian data from 1983 to 1998 accounting for endogeneity and omitted variable bias concerns and then expand it empirically in several directions. I show that it is important to control for the impact of a drastic trade reform shock that affects all sectors and disentangle its e¤ect from preferential trade agreements (PTAs). I find that protection is higher in sectors that are important exports for preferential partners which may be seen as a stumbling block effect of PTAs for Colombia. I also relax the assumption of ?xed political weights that measure the extra importance of producers?welfare relative to consumers in the government objective. I measure the impact of sectoral characteristics on tari¤s indirectly through political weights as a novel alternative to nonstructurally estimating them as determinants of protection. Accordingly, I obtain more realistic estimates for the political weights further contributing to the literature.

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Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 201220R.

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Length: 35 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:hai:wpaper:201220r
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  1. Eslava, Marcela & Haltiwanger Jr, John C & Kugler, Adriana D. & Kugler, Maurice, 2004. "The Effects of Structural Reforms on Productivity- and Profitability-Enhancing Reallocation: Evidence from Colombia," CEPR Discussion Papers 4569, C.E.P.R. Discussion Papers.
  2. Devashish Mitra & Dimitrios Thomakos & Mehmet Ulubasoglu, 2006. "Can we obtain realistic parameter estimates for the `protection for sale' model?," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 187-210, February.
  3. Matschke, Xenia N. & Sherlund, Shane M, 2003. "Do Labor Issues Matter In The Determination Of U.S. Trade Policy? An Empirical Reevaluation," Santa Cruz Department of Economics, Working Paper Series qt82k4x4f5, Department of Economics, UC Santa Cruz.
  4. Yoto V. Yotov, 2010. "Trade-Induced Unemployment: How Much Do We Care?," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 972-989, November.
  5. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/generalized method of moments estimation and testing," Stata Journal, StataCorp LP, vol. 7(4), pages 465-506, December.
  6. Baybars Karacaovali, 2010. "Free Trade Agreements and External Tariffs," Fordham Economics Discussion Paper Series dp2010-03, Fordham University, Department of Economics.
  7. Alessandro Nicita & Marcelo Olarreaga, 2007. "Trade, Production, and Protection Database, 1976--2004," World Bank Economic Review, World Bank Group, vol. 21(1), pages 165-171.
  8. Hiau Looi Kee & Alessandro Nicita & Marcelo Olarreaga, 2008. "Import Demand Elasticities and Trade Distortions," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 666-682, November.
  9. Kleibergen, Frank & Paap, Richard, 2006. "Generalized reduced rank tests using the singular value decomposition," Journal of Econometrics, Elsevier, vol. 133(1), pages 97-126, July.
  10. Imai, Susumu & Katayama, Hajime & Krishna, Kala, 2009. "Is protection really for sale? A survey and directions for future research," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 181-191, March.
  11. Nicita, Alessandro & Olarreaga, Marcelo, 2001. "Trade and production, 1976-99," Policy Research Working Paper Series 2701, The World Bank.
  12. Phillip McCalman, 2004. "Protection for Sale and Trade Liberalization: an Empirical Investigation," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 81-94, 02.
  13. Devashish Mitra & Dimitrios D. Thomakos & Mehmet A. Ulubaşoglu, 2002. ""Protection For Sale" In A Developing Country: Democracy Vs. Dictatorship," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 497-508, August.
  14. Cragg, John G. & Donald, Stephen G., 1993. "Testing Identifiability and Specification in Instrumental Variable Models," Econometric Theory, Cambridge University Press, vol. 9(02), pages 222-240, April.
  15. Quintero Luis Eduardo, 2006. "The Politics of Market Selection," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, June.
  16. Bohara, Alok K. & Gawande, Kishore & Sanguinetti, Pablo, 2004. "Trade diversion and declining tariffs: evidence from Mercosur," Journal of International Economics, Elsevier, vol. 64(1), pages 65-88, October.
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