Macroeconomic Dimensions of Public Finance: Essays in Honour of Vito Tanzi

By Mario I. Blejer; Teresa Ter-Minassian | Go to book overview

11

TRADE REFORM, UNIFORM TARIFFS AND THE BUDGET 1

Sebastian Edwards

INTRODUCTION

As a large number of countries embark on programs aimed at liberalizing their external sector, issues related to the actual design of trade policies have become increasingly important. In particular, the multilateral institutions have become more and more concerned with some of the specific characteristics of reformed (more liberalized) trade regimes. Broad issues such as the adequate sequencing of reform and the relationship between trade liberalization and macroeconomic adjustment have, in fact, dominated recent policy discussions (Choksi and Papageorgiou, 1986). However, at a more specific level, one of the most important aspects in designing a new and more liberalized commercial policy refers to the structure of import tariffs. Should tariffs in certain sectors be higher than in others, or should they be uniform? As a matter of practical advice, for example, the World Bank is increasingly recommending a uniform tariff structure (Shalizi and Squire, 1988). Other policy advisers, however, have argued that non-uniform tariffs are preferable, with higher tariffs granted to those sectors with more potential for creating employment (Foxley, 1983).

The purpose of this chapter is to provide a unifying analysis of the welfare implications of alternative tariff structures in developing countries. More specifically, this chapter investigates the desirability of uniform import tariffs. The analysis presented here expands previous work on the subject by considering a multiple distortions economy and by concentrating on wage rate rigidity as the one distortion that cannot be easily relaxed. This chapter pulls together in a single unified model a number of issues related to tariff structures that until now have been treated separately in the literature.

The fact that in most countries import tariffs are far from uniform (see Table 11.1), indicates that this issue is indeed important from a policy design perspective. Our understanding of the criteria and conditions under which tariff uniformity is indeed optimal should be of help to policymakers and economic advisers for making more informed decisions.

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