TRADE AND INDUSTRIAL POLICY IN DEVELOPING COUNTRIES Also by David Greenaway INTERNATIONAL TRADE POUCY ECONOMIC DEVELOPMENT AND INTERNATIONAL TRADE (editor) CURRENT ISSUES IN INfERNATIONAL TRADE (editor) CURRENT ISSUES IN MACROECONOMICS (editor) Also by Chris Milner EXPORT PROMOTION STRATEGIES: Theory and Evidence from Developing Countries (editor) POUCY ADJUSTMENT IN AFRICA (co-editor) TRADE AND INDUSTRIAL POLICY IN DEVELOPING COUNTRIES A Manual of Policy Analysis David Greenaway and Chris Milner !50th YEAR M MACMILLAN © David Greenaway and Chris Milner 1993 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1993 by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world ISBN 978-0-333-46920-0 ISBN 978-1-349-22782-2 (eBook) DOI 10.1007/978-1-349-22782-2 A catalogue record for this book is available from the British Library. To Susan and Ruth Contents List of Tables xi List of Figures xiv List of Charts XV Preface xvi 1 Introduction and Overview 1 1.1 Background and Aims 1 1.2 Outline of the Manual 2 PART I TRADE AND DEVELOPMENT 2 Instruments of Trade and Industrial Policy 7 2.1 Introduction 7 2.2 Economic effects of instruments of import substitution 8 2.3 Economic effects of instruments of export promotion 28 2.4 Instrument packages and policy strategies 37 2.5 Concluding comments 40 3 Trade Policy and Development 42 3.1 Introduction 42 3.2 Evolution of thought on trade and development 43 3.3 Trade as a source of impoverishment: structuralism 45 3.4 Trade as a source of enrichment: neo-classicism 49 3.5 Policy orientation and trade policy 55 3.6 Concluding comments 59 vii viii Contents PARTll TOOLS OF POLICY EVALUATION: PARTIAL ANALYSIS 4 The Structure of Nominal Protection 63 4.1 Introduction 63 4.2 Measuring nominal tariffs 63 4.3 Measuring non-tariff barriers 68 4.4 The extent of tariff and non-tariff protection 71 4.5 Concluding comments 77 5 Effective Protection Analysis 78 5.1 Introduction 78 5.2 The effective protection concept 79 5.3 Extensions to the effective protection concept 81 5.4 Measurement problems in effective protection analysis 84 5.5 Empirical evidence on effective protection 91 5.6 Policy appraisal issues 95 5. 7 Concluding comments 97 6 Domestic Resource Cost Analysis 98 6.1 Introduction 98 6.2 Domestic resource costs concepts 99 6.3 . Applications of the DRC methodology 102 6.4 DRC analysis and policy appraisal 112 6.5 Concluding comments 114 PARTm TOOLS OF GENERAL EQUILIBRIUM ANALYSIS 7 Shift Analysis and the Incidence of Protection 117 7.1 Introduction 117 7.2 The theoretical framework 118 7.3 True protection and the incidence of protection 122 7.4 Empirical application of the model 126 7.5 Uses and implications of the analysis 132 7.6 Concluding comments 135 8 Computable General Equilibrium Modelling 136 8.1 Introduction 136 8.2 Origins and development of CGE modelling 137 8.3 General equilibrium models: some basic principles 138 8.4 Applying general equilibrium analysis 143 Contents IX 8.5 A CGE model to analyse foreign trade restrictions illustrated 152 8.6 Concluding comments 157 Appendix 8.1: The equations of the TQR model 158 9 Applied CGE Analysis of Trade Policy 162 9.1 Introduction 162 9.2 Effective protection and resource pulls 163 9.3 Costs of protection and rent seeking 166 9.4 Trade regimes and market structure 168 9.5 Trade taxation and government revenue 172 9.6 Growth and trade strategy simulation 175 9. 7 Concluding comments 177 PART IV EVALUATING COMPARATIVE ADVANTAGE 10 Revealed Comparative Advantage 181 10.1 Introduction 181 10.2 Conceptual issues and problems 182 10.3 Trade performance and 'revealed' comparative advantage 184 10.4 A price-based measure of revealed comparative advantage 188 10.5 Concluding comments 193 11 Potential Comparative Advantage 194 11.1 Introduction 194 11.2 Factor content and the stages approach 195 11.3 Export similarity and comparative trade performance 198 11.4 Policy reform and cost competitiveness 205 11.5 Concluding comments 208 PARTV THE MODELLING AND REFORMULATION OF POLICY 12 Structural Adjustment Lending: Rationale and Trade Policy Aspects 211 12.1 Introduction 211 12.2 Structural adjustment lending: origins and structure 212 12.3 Trade policy reform in SALs 219 12.4 The role of policy appraisal in SALs 222 12.5 Concluding comments 225 x Contents 13 Structural Adjustment Lending: Timing, Sequencing and Economic Effects 226 13.1 Introduction 226 13.2 Adjustment experience and economic performance 227 13.3 Timing, sequencing and adjustment 235 13.4 Factors influencing sustainability 239 13.5 Policy appraisal, timing, sequencing and adjustment 241 13.6 Concluding comments 241 Notes 243 References 246 Name Index 255 Subject Index 257