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When is trade liberalization desirable (in theory)?
We get a negative relationship between s and g even though policy intervention
maximizes the growth rate and we would never want to restrain governments
from using policy intervention s.
Non-operational truisms
“I would suggest that the rate at which countries grow is
substantially determined by three things: their ability to integrate
with the global economy through trade and investment; their
capacity to maintain sustainable government finances and sound
money; and their ability to put in place an institutional environment
in which contracts can be enforced and property rights can be
established. I would challenge anyone to identify a country that
has done all three of these things and has not grown at a
substantial rate.”
But:
-- Larry Summers (2003)
• “ability” to do X and “capacity” to manage Y do not tell us what
the requisite policies area
• and if we try to give it operational content, it turns out that the
immediate implications are not quite consistent with the evidence
Open-ended list of complementary reforms
A recommendation contingent on all the requisite “complementary
reforms”—many of which cannot be specified ex ante--is impractical (and
defeats the purpose of reform).
X j
X i
du
i
  j
d i
 i j i  i
Total effect = direct effect (positive)
+ sum of all other indirect
effects (positive or negative)
Low agricultural productivity
Price liberalization
Private incentives
Privatization
Contract enforcement
Legal reform
Fiscal revenues
Tax reform
Urban wages
Corporatization
Monopoly
Trade liberalization
Enterprise restructuring
Financial sector reform
Unemployment
Labor market flexibility
And so on...
* The (sufficient) condition is that the activity whose tax is being reduced be a net
substitute (in general equilibrium) to all the other goods.
Source: Heilmann (2008)
Growth Diagnostics
Reasons for low private investment
Low return to economic activity
Low social returns
High cost of finance
bad international
finance
Low appropriability
government
failures
poor
geography
low
human
capital
bad infrastructure
micro risks:
property rights,
corruption,
taxes
bad local finance
market
failures
information
externalities:
“self-discovery”
macro risks:
financial,
monetary, fiscal
instability
coordination
externalities
low
domestic
saving
poor
intermediation