Trade Policy in Developing Countries

By Edward F. Buffie | Go to book overview

CHAPTER 5
Underemployment, Underinvestment,
and Optimal Trade Policy

Chapter 3 ended with the discouraging conclusion that we know much more about the consequences of bad trade policy than about the makeup of optimal trade policy. The orthodox critique of protection in LDCs has established to almost everyone's satisfaction that extreme importsubstituting policies are detrimental. But what of less extreme policies? Is moderate protection appropriate in some countries? The answer of classical trade theory is a flat no: distortions in goods and factor markets which make protection welfare-improving can be dealt with more effectively by nontrade taxes and subsidies that directly counteract the source of market failure. Most countries are told therefore to move as rapidly and as far toward free trade as political contraints permit. The problem with this uncompromising position is that free trade is not optimal if nontrade taxes and subsidies incur greater administrative costs or present policy makers with a less favorable strategic environment than trade taxes. These qualifications matter. While it is not clear how much adverse strategic effects weaken the case for free trade, there is little doubt that administrative costs are important in practice. Fraud and enforcement problems are likely to undermine even moderately differentiated tax/subsidy systems; consequently, optimal tax policy boils down to finding simple systems that minimize demands on administrative capabilities and satisfy a few basic, important objectives (Bird, 1991; Khalizadeh-Shirazi and Shah, 1991; Thirsk, 1991). There is now a broad consensus in the development public finance literature that this means that most countries should rely on a consumption-based VAT (value added tax) to raise revenue and use trade taxes to ameliorate major market failures. Of course, the separation of tasks is not really this clean. Trade taxes are a source of revenue and a VAT of limited scope distorts consumer prices and may also affect the distortions targeted by the trade ministry. The taxes have to be carefully coordinated to achieve the twin objectives of sufficient revenue generation and greater efficiency.

Not much is known about what this implies for policy, except that it will not be optimal to favor the import-competing sector with an effective rate of protection of 150%. Formal theoretical analyses of optimal

-124-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Trade Policy in Developing Countries
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
/ 400

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.