Specialisation: Pro and Anti-Globalizing 1990-2002

Specialization alters the incidence of trade costs to buyers and sellers, with pro-and anti-globalizing effects on 76 countries from 1990-2002. The structural gravity model yields measures of Constructed Home Bias and the Total Factor Productivity effect of changing incidence. A bit more than half the world's countries experience declining constructed home bias and rising real output while the remainder of countries experience rising home bias and falling real output. The effects are big for the outliers. A novel test of the structural gravity model restrictions shows it comes very close in an economic sense.

Tariff index theory

For a single tariff, the height of the tariff is an unambiguous measure of the policy's restrictiveness. With more than one tariff, theory has not provided an extension that captures the idea of the tariff's height, so analysts have used index numbers such as the mean and the coefficient of variation (standard deviation divided by the mean) of tariffs. By contrast, the theoretical literature on the piecemeal reform of tariffs shows that efficiency gains from tariff reform depend on complex conditions that have little relation to the mean or variance of tariffs. But in the absence of a connection between theory and empirical measures, it is difficult to know whether to discard the measures. Moreover, the piecemeal reform question of measuring the welfare gain from a tariff is not directly related to the problem of evaluating the height of restrictiveness. The problem of finding a single number analogous to the height of tariffs is the tariff index number problem. The authors have developed a solution: the Trade Restrictiveness Index, which they define as the uniform tariff factor that is equivalent in trade restrictiveness (equivalent in the balance of trade) to the actual differentiated tariff structure. Here, the author develops the Trade Restrictiveness Index in terms of mean and variance-covariance indexes of the tariff schedule. There are two payoffs. First, the Trade Restrictiveness Index can be decomposed into expressions that rescue the commonsense idea that lower mean and lower variance of tariffs are both efficient. Second, a special case is offered in which the proper weights in the mean and variance of tariffs are the observed trade weights. Thus, the Trade Restrictiveness Index is superior to traditional summary measures such as the average tariff rate and the coefficient variation for the tariff schedule. It requires only limited additional information on the structure of the economy to yield a measure that is preferable on both theoretical and practical grounds.Environmental Economics&Policies,Export Competitiveness,Trade Policy,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research

Commercial Policy in a Predatory World

Mutual causation of predation and trade induces novel effects of commercial policy in this paper. The model can explain trade volume responses to market widening initiatives that are otherwise puzzlingly 'too big' or 'too small'. Efficient commercial policy (broadly defined) depends crucially on the strength of enforcement. Externalities arising between traders are normally internalized by subsidizing (taxing) trade when enforcement is weak (strong). Efficient regional policy squeezes weak enforcement markets while subsidizing strong enforcement markets. Tolerance (intolerance) of smuggling is rational when enforcement is weak (strong).

Costs of taxation and benefits of public goods with multiple taxes and goods

The recent public economics literature involves an apparent consensus that income effects reduce the costs of raising revenues and hence increase the desirable level of public good provision. Higher taxes can indeed reduce the demand for leisure -- and hence increase the supply of taxed labor -- through income effects. However, the consensus is wrong because the income effects of taxes must be considered symmetrically with those from provision of public goods. This paper uses a model with multiple public goods and taxes to derive consistent measures of the marginal benefits of publicly-provided goods and their marginal social costs. With this model, the authors show that either compensated approaches excluding these income effects or uncompensated approaches including them may be used. If an uncompensated measure of the marginal cost of funds is used, however, the benefits of providing public goods should be adjusted with a simple, benefit multiplier not previously seen in the literature. Once this is done, the optimal level of public provision is independent of whether compensated or uncompensated approaches are used. Proper accounting for these income effects -- or their omission using a compensated approach -- appears to substantially raise the hurdle for government provision where there are substantial taxes bearing on labor.Economic Theory&Research,Public Sector Economics,Debt Markets,Emerging Markets,Taxation&Subsidies

Specialisation : pro and anti-globalizing 1990-2002

Specialization alters the incidence of trade costs to buyers and sellers, with pro-and anti-globalizing effects on 76 countries from 1990-2002. The structural gravity model yields measures of Constructed Home Bias and the Total Factor Productivity effect of changing incidence. A bit more than half the world's countries experience declining constructed home bias and rising real output while the remainder of countries experi- ence rising home bias and falling real output. The effects are big for the outliers. A novel test of the structural gravity model restrictions shows it comes very close in an economic sense

Political Pressure Deflection

Much economic policy is deliberately shifted away from direct political processes to administrative processes --- political pressure deflection. Pressure deflection poses a puzzle to standard political economy models which suggest that having policies to `sell' is valuable to politicians. The puzzle is solved here by showing that incumbents will favor pressure deflection since it can deter viability of a challenger, essentially like entry deterrence. U.S. trade policy since 1934 provides a prime example, especially antidumping law and its evolution.

Trade, Insecurity, and Home Bias: An Empirical Investigation

Corruption and imperfect contract enforcement dramatically reduce trade. This paper estimates the reduction, using a structural model of import demand in which transactions costs impose a price markup on traded goods. We find that inadequate institutions constrain trade far more than tariffs do. We also find that omitting indexes of institutional quality from the model leads to an underestimate of home bias. Using a broad sample of countries, we find that the traded goods expenditure share declines significantly as income per capita rises, other things equal. Cross-country variation in the effectiveness of institutions offers a simple explanation of the observed global pattern of trade, in which high-income, capital-abundant countries trade disproportionately with one another.

Evaluating public expenditures when governments must rely on distortionary taxation

Anderson and Martin provide simple, robust rules for evaluating public spending in distorted economies. Their analysis integrates, within a clean unified framework, previous treatments of project evaluation as special cases. In this paper, the authors use a general system of fiscal accounting for marginal changes in the provision of public that allows them to account for various approaches to the funding of government projects. They obtain two key results that seem likely to be useful for project evaluation. Firstly, the shadow prices of traded (as well as non-traded) goods are not generally equal to their world prices, but differ from world prices by an amount that depends upon the impact of the project on government revenues and on the Marginal Cost of Funds (MCF). Secondly, the costs of a government project need to be adjusted by the Marginal Cost of Funds before being compared with the benefits accruing from the project. The analysis leads to operational rules for project evaluation that are only slightly more complex than the border pricing rule. To conduct the analysis, the authors utilize a framework that makes explicit the role of government in providing public goods and services subject to a budget constraint. They consider first in Section 1 a general welfare analysis of the provision of a public good which is purchased from the rest of the world and paid for out of distortionary tax revenue. In Section 2 they consider the nature of the resulting shadow prices in more detail. In Section 3 the authors consider the role of the MCF in evaluating the cost of project inputs. Section 4 deals with user charges for public goods, which are of course only feasible when such goods are excludable. Section 5 places the results in the context of the earlier literature in order to clarify the relationship between their results and those obtained by earlier authors. Section 6 provides some simple numerical examples to highlight the potential importance allowing for the costs of raising funds.Public Sector Economics&Finance,Environmental Economics&Policies,Markets and Market Access,Economic Theory&Research,Banks&Banking Reform,Public Sector Economics&Finance,Access to Markets,Markets and Market Access,Economic Theory&Research,Environmental Economics&Policies

Imperfect Contract Enforcement

We model imperfect contract enforcement when repudiators and their victims default to spot trading. The interaction between the contract and spot markets under improved enforcement can exacerbate repudiation and reduce contract execution, harming all traders. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from contracts found to be unfavorable. Multiple equilibria and multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement is optimal from their side of international markets. The model thus rationalizes the internationally varying patterns of imperfect enforceability observable in survey data.