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Endogenous Trade Policies in a Developing Economy

  • N.M. Hung
  • N.V. Quyen
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    Consider a small developing economy with a manufacturing sector opened to international trade, and an agricultural sector having limited, not to say any, access to world markets. We modify the Grossman and Helpman's influence-driven model of trade policy formation to allow for an endogenously determined wage rate in a three-sector economy where the manufacturing sector can lobby policy makers for favorable policies. Beside protectionist policies, namely an import tariff or an export subsidy, we show that the owners of the specific factor in agriculture - a non-lobby group - have to bear a consumption tax imposed on their products. This would further strengthen the trade protectionist measure, and imply possibly undesirable general equilibrium repercussions: there will be a reallocation of labor to the manufacturing sector which enjoys an output expansion, an output contraction in the agricultural sector, and a lower workers' "real" income.

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    File URL: http://www.ecn.ulaval.ca/w3/recherche/cahiers/2006/0602.pdf
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    Paper provided by Université Laval - Département d'économique in its series Cahiers de recherche with number 0602.

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    Date of creation: 2006
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    Handle: RePEc:lvl:laeccr:0602
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    1. Samuelson, Paul A., 1971. "An exact Hume-Ricardo-Marshall model of international trade," Journal of International Economics, Elsevier, vol. 1(1), pages 1-18, February.
    2. Devashish Mitra, 1999. "Endogenous Lobby Formation and Endogenous Protection: A Long-Run Model of Trade Policy Determination," American Economic Review, American Economic Association, vol. 89(5), pages 1116-1134, December.
    3. Van Long, Ngo & Vousden, Neil, 1991. "Protectionist responses and declining industries," Journal of International Economics, Elsevier, vol. 30(1-2), pages 87-103, February.
    4. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
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