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Trade liberalization and endogenous growth in a small open economy : a quantitative assessment

Author

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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.

Suggested Citation

  • Rutherford, Thomas F. & Tarr, David G., 1998. "Trade liberalization and endogenous growth in a small open economy : a quantitative assessment," Policy Research Working Paper Series 1970, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1970
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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 1872, The World Bank.
    2. 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.
    3. repec:bla:worlde:v:40:y:2017:i:4:p:743-763 is not listed on IDEAS
    4. Funke, Michael & Ruhwedel, Ralf, 2003. "Trade, product variety and welfare : a quantitative assessment for the transition economies in Central and Eastern Europe," BOFIT Discussion Papers 17/2003, Bank of Finland, Institute for Economies in Transition.
    5. Jesper Jensen & Thomas Rutherford & David Tarr, 2014. "The Impact of Liberalizing Barriers to Foreign Direct Investment in Services: The Case of Russian Accession to the World Trade Organization," World Scientific Book Chapters,in: APPLIED TRADE POLICY MODELING IN 16 COUNTRIES Insights and Impacts from World Bank CGE Based Projects, chapter 6, pages 125-149 World Scientific Publishing Co. Pte. Ltd..
    6. James R. Markusen & Thomas F. Rutherford & David Tarr, 2000. "Foreign Direct Investments in Services and the Domestic Market for Expertise," NBER Working Papers 7700, National Bureau of Economic Research, Inc.
    7. Eromenko, Igor, 2002. "EU Enlargement to the East and its Impact on Non-accessing Countries, Applied General Equilibrium Analysis," MPRA Paper 67534, University Library of Munich, Germany.
    8. Rutherford, Thomas & Tarr, David, 2008. "Regional household and poverty effects of Russia's accession to the world trade organization," Policy Research Working Paper Series 4570, The World Bank.
    9. Rutherford, Thomas & Tarr, David, 2006. "Regional impacts of Russia's accession to the World Trade Organization," Policy Research Working Paper Series 4015, The World Bank.
    10. Light Miles K., 2004. "FTAA and Service Liberalization in Colombia," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, April.
    11. Jensen, Jesper & Tarr, David, 2007. "The impact of Kazakhstan accession to the World Trade Organization : a quantitative assessment," Policy Research Working Paper Series 4142, The World Bank.
    12. Sabine Mage-Bertomeu, 2006. "Les modèles d'équilibre général appliqués à la politique commerciale : développements récents," Revue d'économie politique, Dalloz, vol. 116(3), pages 357-381.

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