Development, Trade, and the WTO: A Handbook

Development, Trade, and the WTO: A Handbook

Development, Trade, and the WTO: A Handbook

Development, Trade, and the WTO: A Handbook


Developing countries are increasingly confronted with the need to address trade policy related issues in international agreements, most prominently the World Trade Organization (WTO). New WTO negotiations on a broad range of subjects were launched in November 2001. Determining whether and how international trade agreements can support economic development is a major challenge. Stakeholders in developing countries must be informed on the issues and understand how their interests can be pursued through international cooperation.This handbook offers guidance on the design of trade policy reform, surveys key disciplines and the functioning of the World Trade Organization (WTO), and discusses numerous issues and options that confront developing countries in using international cooperation to improve domestic policy and obtain access to export markets. Many of the issues discussed are also relevant in the context of regional integration agreements.Includes two CD-ROMs: CD-ROM 1 with 'A Dataset on Trade and Production, 1976-99' by Alessandro Nicita and Marcelo Olarreaga; and CD-ROM 2 with 'Applied Trade Policy for Developing Countries: Outline, Content, and Readings for a Short Course' by Jaime de Melo and Marc Bacchetta.


Dani Rodrik

Economists are trained to think about trade policy reform in terms of changes in the levels of tariffs and quantitative restrictions (QRs) and the shifts in relative prices brought about by these alterations. They use economic models, supplemented by quantitative estimates of elasticities, to analyze the implications of changes in tariffs and QRs for production, consumption, and trade. By tweaking their models sufficiently, they can predict the likely impacts on employment, poverty and distribution, macroeconomic balances, and the government budget. If they are ambitious (reckless?), they will also pass judgment on dynamic efficiency, technological progress, and long-run economic growth.

Policymakers often have a different perspective on trade reform. For them, the actual changes in tariff schedules are typically only a small part of the process. What is at stake is a deeper transformation of the patterns of behavior within the public sector, and of the government’s relationship with the private sector and the rest of the world. the reform goes beyond particular levels of tariffs and QRs: it sets new rules and expectations regarding how these policy choices are made and implemented, establishes new constraints and opportunities for economic policy more broadly, creates a new set of stakeholders while disenfranchising the previous ones, and gives rise to a new philosophy (alongside a new rhetoric) on what development policy is all about. Hence, trade reform ends up being much more than a change in relative prices: it results in institutional reform of a major kind.

In the language of economics, institutional reform changes not only policy parameters but also behavioral relationships. Correspondingly, the resource-allocation and dynamic consequences of trade reform become harder to discern using the type of analysis that is the applied economists’ stock in trade. Household behavior and investment decisions get altered in ways that are difficult to track in the absence of knowledge about the “deep parameters” of the economy. When the reform is well designed and consistent with the institutional needs of the economy, it can spur unexpected levels of entrepreneurial dynamism and economic growth. When it is not, it can result in a stagnation that will appear surprising.

Viewing trade reform as institutional reform helps clarify the criteria by which trade reform should be evaluated. My main argument in this chapter is that the relevant criterion is neither openness to trade nor consistency with existing wto rules. the yardstick that matters is the degree to which trade reform contributes to the construction of a high-quality institutional environment at home. My working hypothesis, supported by empirical evidence to which I will refer below, is that a high-

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