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Measure and interpretation of effective protection in the presence of high capital costs : evidence from India

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  • Ettori, Francois M.
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    This paper is derived from a previous working paper prepared within a comprehensive review of India's trade regime and protection policies. One striking feature of India's protection structure has been the very high tariffs and protection on capital goods, thereby harming industrial competitiveness (and export potential) and distorting industrial incentives as they are indicated by Effective Protection Rates (EPRs). This paper presents three main themes. First, it provides a brief refresher on the definition of EPR and its limited interpretation as a measure of the scope for inefficiency or extra-profit resulting from protection, with a simple geometrical representation. In the second part, the paper introduces the notions and formulae of Corrected Effective Protection Rates (CEPR) and Net Effective Protection (NEPR), also with a geometrical representation. Finally, the paper tests the relevance of these notions, and assesses their magnitude -- in the case of India on the basis of a sample of some 60 industrial projects. A brief conclusion summarizes the major findings and draws some tentative conclusions.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 873.

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    Date of creation: 31 Mar 1992
    Handle: RePEc:wbk:wbrwps:873
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    1. Bruno, Michael, 1972. "Domestic Resource Costs and Effective Protection: Clarification and Synthesis," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 16-33, Jan.-Feb..
    2. Bela Balassa & Daniel M. Schydlowsky, 1968. "Effective Tariffs, Domestic Cost of Foreign Exchange, and the Equilibrium Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 76, pages 348-348.
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