P 0 L I C Y A N D R E S E A R C H S E R I E S

10 8516" V l '1 0

LESSONS IN

TRADE POLICY REFORM

VINOD THOMAS

KAZI MARTIN

JOHN NASH

Country Economics Department

%E COPYPOLICY, RESEARCH, AND EXTERNAL AFFAIRS

THE WORLD BANK

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Titles in the Policy and Research Series

PRS1 Adjustment Lending: An Evaluation of Ten Years of Experience Country EconomicsDepartment

PRS2 Tax Policy in Sub-Saharan Africa: A Framework for Analysis Zmarak ShaliziLyn Squire

PRS3 The Effects of Industrial Countries' Policies on Developing J. Michael FingerCountries Patrick Messerlin

PRS4 The Reform of State-Owned Enterprises: Lessons from Mary ShirleyWorld Bank Lending

PRS5 Trade Finance in Developing Countries Yung Whee Rhee

PRS6 Seatrade, Logistics, and Transport Hans Jiirgen Peters

PRS7 Competition Policies for Industrializing Countries Claudio R. Frischtakwith Bita Hadjimichaeland Ulrich Zachau

PRS8 Soil Conservation in Developing Countries: Project and Jock AndersonPolicy Intervention Jesuthason Thampapillai

PRS9 Industrial Restructuring: Policy and Practice Ira W. Lieberman

PRSIO Lessons in Trade Policy Reform Vinod ThomasKazi MatinJohn Nash

P O L I C Y A N D R E S E A R C H S E R I E S

I0

LESSONS IN TRADE POLICY REFORM

VINOD THoMAsKAZI MATINJOHN NASH

Trade Policy DivisionCountry Economics Department

Acknowledgment

This paper is based on a larger study entitled "Strengthening Trade Policy Reform"from the Trade Policy Division containing contributions by Sebastian Edwards,Nadav Halevi Thomas Hutcheson, Andras Inotai, Donald Keesing, Ramon Lopez,Garry Pursell, and Alexander Yeats, under the overall guidance of Stanley Fischerand John A. Holsen, and with major inputs, detailed comments, and assistancefrom many others.

The World BankWashington, D.C.

Copyright © 1990The World Bank1818 H Street, NWWashington, DC 20433, USA

All rights reservedManufactured in the United States of AmericaFirst printing March 1990PRS10

Papers in the Policy & Research Series present results of policy analysis and research to encouragediscussion and comment. To disseminate the findings with the least possible delay, the text has notbeen edited as would be appropriate to more formal publications, and the World Bank accepts no re-sponsibility for errors. Citation and the use of such a paper should take account of its provisionalcharacter. The findings, interpretations, and conclusions expressed in this paper are entirely those ofthe author(s) and should not be attributed in any manner to the World Bank, to its affiliated organiza-tions, or to members of its Board of Executive Directors or the countries they represent. The World Bankdoes not guarantee the accuracy of the data included in this publication and accepts no responsibilitywhatsoever for any consequence of their use.

The material in this publication is copyrighted. Requests for permission to reproduce portions of itshould be sent to the Director, Publications Department, at the address shown in the copyright noticeabove. The World Bank encourages dissemination of its work and will normally give permissionpromptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permissionto photocopy portions for classroom use is not required, though notification of such use having beenmade will be appreciated.

The complete backlist of publications from the World Bank is shown in the annual Index of Publications,which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors,and countries and regions. The latest edition is available free of charge from Publications Sales Unit,Department F, The World Bank, 1818 H Street, NW, Washington, DC, USA, or from Publications, TheWorld Bank, 66 avenue d'Iena, 75116 Paris, France.

Vinod Thomas is the division chief in the Trade Policy Division of the Countby Economics Department.Kazi Matin and John Nash are economists in the Trade Policy Division cf the Country EconomicsDepartment.

ISSN 1013-3429

Library of Congress Cataloging-in-Publication Data

Thomas, Vinod, 1949-Lessons in trade policy reform / Vinod Thomas, Kazi Matin, John Nash.

p. cm. -(Policy & research series; 10)ISBN 0-8213-1464-51. Developing countries - Commercial policy. 2. Economic development., I. Matin, K. M. II. Nash,

John D., 1953- III. Title. IV. Series.HF1413.T52 1990382'.3'091724 - dc2O 90-12085

CIP

Table of Contents

1 Introduction 1

2 Reform Experience and Implications 3

3 Sequencing and Timing of Reforms 7

4 Trade Policy Measures 10

5 Complementary Policies 15

6 Credibility and Sustainability 17

Notes 18

Tables

1 Major trade policy reform proposals among countries receiving WorldBank trade adjustment loans, 1979-87 4

2 Macroeconomic indicators before and after reform in trade adjustmentloan countries with implementation data 8

3 Exports of nonoil developing countries as a share of exports fromdeveloping countries to industrial countries, with selected countryexamples 11

Figures

1 Real exchange rate indices, for selected country groupings,1978-88 4

2 GDP and export growth for developing countries, 1965-88 5

iii

1Introduction

Rationalefor trade policy reform. Trade reform pro- fiscal deficit. The second is that there are nograms have two main objectives. The first is to strong grounds for believing that trade liberali-help raise economic growth and employment zation raises economic efficiency and the growthgeneration by improving resource allocation and of output and exports, and that the protection ofeconomywide efficiency. The second is to help import-substitution activities, especially infantimprove the balance of payments by strengthen- industries, will do more to promote economicing the competitiveness of the external sector and growth. Moreover, world conditions might notexpanding exports and efficient import substi- permit reforming countries to increase their ex-tutes. The importance of each objective has var- ports and export revenues.2 The third concern isied from country to country. Most developing that the import liberalization's adjustments incountries have structural rigidities and trade re- the production structure may produce unemploy-strictions that obstruct economic growth. Many ment and devaluations may increase the infla-of them, in the wake of adverse external shocks, tion rate.rising fiscal deficits, and serious balance of pay-ments problems of the early 1980s, responded Focus of the paper. This paper evaluates de-initially by tightening their import restrictions - veloping country experience with trade policya response that intensified the bias against trade, reforms and makes recommendations for improv-particularly exports. But with balance of pay- ing the design and implementation of those re-ments problems persisting, they began to reform forms. It assesses the extent and effectiveness oftrade policies and make their economies more the reforms under adjustment programs in theopen. Such reforms have figured prominently in 1980s, highlighting practical problems and con-the policy changes supported by World Bank ad- straints, both economic and political.3 In particu-justment loans and by IMF arrangements, lend- lar, it examines the effect of the Bank's adjust-ing intended in part to finance temporary in- ment lending on trade policy and economic per-creases in imports (without corresponding in- formance. Broadly speaking, it considers threecreases in exports) that greater openness might issues: (1) the potential conflicts between tradebring.1 policy reforms and macroeconomic stabilization

efforts, (2) the supply response to trade policyObjections to trade liberalization. Three con- reforms, in the context of export prospects and

cerns have been raised about trade liberalization: domestic and external constraints, and (3) the se-The first is that trade liberalization conflicts with quencing, timing, and duration of import reforms,other, more important policy objectives, particu- their relation to internal reforms, and the associ-larly those for the balance of payments and the ated transitional costs.

1

The paper finds that trade policy reform, policy affecting the export and import regimeswhen implemented well, has contributed to im- and the domestic sector. "Trade policy reform"proved economic performance in developing has many meanings, but in this report it coverscountries. Such reform is essential for linking measures that move the trade regime toward adeveloping economies to technological advances more neutral incentive framework for foreignand for enabling them to compete in an increas- trade, toward a more liberal trade regime, oringly integrated world - the reality of business toward both. Neutrality refers here to incentivestoday. But to strengthen the effectiveness of trade among and between exportables and importables,reforms, their design and implementation must between sales to domestic and export markets,take into account interactions with reforms of and between tradables and nontradables. A moreother key policies, with institutions, and with liberal trade regime refers to the reduction ofinfrastructure. The analysis here shows that the controls and to the replacement of direct controlssupply response has been stronger in countries and interventions by price mechanisms. Policieswhere institutions and infrastructure supported for greater neutrality usually involve liberaliza-the reforms and resource reallocation. That tion measures: for example, lowering export andresponse has also depended on how well the import restrictions. But greater neutrality mayinterconnections with other macroeconomic and also come from interventions to develop exportssectoral policies were addressed. - for example, duty drawbacks. In turn, most

The paper also finds that well-designed liberalizing measures promote greater neutral-trade policy reforms do not conflict with other ity, but not all do: exceptions include replacingpriorities except in special cases; usually they quantitative restrictions by equivalent tariffs.4

enhance growth. Trade policy reforms, in view There naturally are different routes to both neu-of their economy-wide effects, should continue trality and liberalization. Successful trade re-to have a central place in adjustment efforts. For forms have included substantial liberalizationsbetter effectiveness, however, two design issues (Chile and Mexico). Neutrality-increasing reformsin particular - interfacing liberalization with sta- have also sometimes involved new governmentbilization and with internal market reform - de- interventions to support exports (Republic ofserve greater attention. Korea and Taiwan, China). Not all government

actions to approach neutrality or all partial liber-What is trade policy reform? Trade policy alization measures, however, necessarily increase

comprises exchange rate policy and commercial efficiency.'

2

2Reform Experience and Implications

Policy Changes reform in still others (Chile, Mexico, and Tur-key). A few countries, notably Bolivia and Haiti,

What was proposed? Since 1979 the World Bank, also substantially reformed their trade policiesusually in conjunction with the IMF, has sup- during 1979-87 without receiving trade adjust-ported trade policy reforms through adjustment ment loans. Progress has been made in correct-loans. Some of these loans are labeled trade ad- ing misaligned exchange rates (figure 1) and injustment loans (Indonesia and Mexico), although reducing impediments to exports, including re-a few of them may have a stronger bearing on the strictions on imports needed by exporters. Onmacroeconomy or on a sector than on commer- the import side, several countries have substi-cial policy (Colombia). Others are structural ad- tuted tariffs for quantitative restrictions. Reduc-justment loans with trade reform components tions of both quantitative restrictions and tariff(Jamaica and Turkey). Still others are sectoral levels - and thus of nominal and effective pro-adjustment loans with a substantial trade reform tection levels - have generally been more mod-component (Ghana and Morocco). Overall dur- est. But several countries have made good prog-ing 1979-87, an estimated 81 adjustment loans to ress in this regard, among them Bolivia, Costa41 countries contained substantial proposals for Rica, Chile, Ghana, Korea, Mexico, and, until re-trade policy reform (table 1).6 With nine "Inten- cently, Turkey. In nearly all these countries, thesity of Proposed Reform" indicators (not mutu- bias against trade and particularly exportablesally exclusive), the proposed reform measures declined in part as a result of the reduced importcould be considered "strong" in 31 percent of the protection.8 For most other countries, however,cases, "moderate" in 45 percent, and "mild ' in the data to evaluate reductions in the antiexportthe remaining 24 percent. Policy proposals for bias are lacking. For the recipients of trade ad-exports and quantitative restrictions were gener- justment loans, the measured ratios of imports toally stronger than those for the level and disper- GDP (in current and constant prices) have risension of tariffs. relative to those for nonrecipient countries, indi-

cating the influence of both increased financingImplementation record. Reform implemen- and import liberalization.

tation by trade loan recipients varied substan-tially across countries and policy areas .' In some Constraints to better implementation. Policycountries, there was little progress in reforms - changes and outcomes have been more extensiveor reforms were reversed - during 1979-87 in trade policy than in most other areas of adjust-(Guyana, Yugoslavia, Zambia, and Zimbabwe); ment lending. But policy implementation, espe-there was modest progress in others (Bangladesh cially with respect to protection levels, has beenand Madagascar); and there was considerable weaker than expected. Four sets of domestic fac-

3

Table 1 Major Trade Policy Reform Proposals among Countries Receiving World Bank TradeAdjustment Loans, 1979-87

NotArea of reform proposal Present present Strong Moderate Mild

Exchange rate 38 2Export promotion 33 7Protection studies 28 12

Intensity of reform proposalsOverall export policy 15 15 10

Imported inputs used in exports 17 15 8Overall import policy 14 15 11

Protective quantitative restrictions 14 15 11Nonprotective quantitative restrictions 14 16 10Tariff level 7 21 12Tariff dispersion 7 24 9Schedule of future action 6 29 5

Overall reduction in antiexport bias 17 12 11

Percent of total 31 45 24

a. Nonprotective quantitative restrictions refer to controls on items that are not domestically produced.Sourc. The classifications are based on a comparative review of available evidence and on interviews with Bank staff.

Flgure 1: Real Exchange Rate Indices, for Selected Country Groupings, 1978-88(unwelghted averages; 1980=11)

115

110 0

105~~~~~~~~~~~~~~~~~~~~~~~~0105~ 21 INDs

100 _._._._ -_ , . . . . . .

47NTALs '

x

90

8540TALs

80

75

70. .. , ,,,, _1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

21 INDs = twenty-one industrial countries.40 TALs = forty trade adjustment loan recipient countries.47 NTALs = forty-seven nonrecipients of trade adjustment loans.Note: Multilateral index of the real exchange rate measured against a basket of currencies of trading partners.Increase in index indicates a real appreciation.Source: Based on IMF data. ksr/w45860

4

tors constrain stronger and more sustained re- Performance Outcomesforms.

- Vested interests against reform and inade- Evidence from experience. If countries are to com-quate convictions about its benefits have com- pete in a rapidly modernizing international econ-bined to weaken the commitment to reform omy, they need to increase their efficiency, be-(Kenya, Peru, Zimbabwe, and Yugoslavia). come flexible in their production structures, and

* Inadequate implementation capacity result- adapt to changing global demands. This study'sing from administrative and institutional bottle- findings corroborate the positive association be-necks have contributed to implementation set- tween exports and economic growth found inbacks (Bangladesh, Cote d'Ivoire, and Malawi). previous work. Since exports are usually rela-Reforms to strengthen public institutions have tively labor-intensive, this growth is also expectedreceived inadequate attention. to generate employment. Without implying cau-

* Weak macroeconomic performance and con- sality, there is a positive correlation betweenflicts between policy reform and stabilization export and output growth (figure 2). But tracinggoals have sometimes slowed the trade liberali- the influence of specific policies behind superiorzation (Morocco, the Philippines, and Turkey) or export and GDP growth is complex, because ofreversed it (Argentina and Zambia). the simultaneous presence of other contributing

* Lags in the supply response to policy reform factors. Policy reforms can also take time to pro-have, by reducing the apparent benefits, limited duce the expected improvements in resource al-the enthusiasm for reform, especially in low-in- location, efficiency, and growth. Bearing thesecome Africa. caveats in mind, the adjustment episodes of the

Figure 2: GDP and Export Growth for Developing Countries, 1965-88

30

L

Korea0

20 Jordan o Botswana

Turkey/

10~~~~~~~lo Brazil 0@ *

X Chile0 o China OmanMorocco . 9->;O Indonesia °

Argentina o 0 Pakistan

/ * O~~~ Syriao - qGhana

0 Uganda

o Mozambique-10

-5 0 5 . 10 15 20GDP (%)

,DP = Average GDP growth rate during 1965-88.X = Average growth rate of exports of goods and nonfactor services during 1965-88.LL = Fitted line based on least square regression.Note: See chapter 1, box 1-3 and annex table A-3, for the countries included in this category.World Bank data. ksr/w45860c

5

1980s and longer-term experience suggest that borers, but there may also be increases in thetrade policy and structural reforms have contrib- employment of low-income laborers.uted to the growth in output and exports. Realexchange rate depreciation and commercial pol- The supply response. The response of out-icy reform are linked to such improved perform- put to policy change varies considerably acrossance. The additional financing and policy re- countries. Country studies identify several fac-forms connected with adjustment lending have tors that may abet or constrain the supply re-each contributed to relative improvements in the sponse.1980s. After controlling for some other factors, * Insufficient attention to the institutional andtrade adjustment lending is associated with a infrastructural needs of exporters has often beenmild improvement in GDP, exports, and other a problem (weak systems for providing duty-freevariables. This improvement is stronger and sta- and restriction-free access to imported inputs; in-tistically more significant among early and inten- adequate port, transport and telecommunicationssive loan recipients (those receiving three or more facilities; and poor information and marketingadjustment loans with a substantial trade compo- services for exporters).nent). Accordingly, the results measured for all * Domestic regulatory policies determinerecipients are likely to understate the benefits whether incentives actually change in responsebecause they include outcomes of early stages of to reform (price decontrols) and affect the mobil-a continuing process for some. The results are ity of factors of production in response to changesalso stronger and statistically more significant in incentives (labor regulation, market entry andwhen the comparison is between trade policy exit regulations, foreign investment controls).reformers and nonreformers rather than simply * Some public sector policies do not supportbetween trade loan recipients and nonrecipients. rapid adjustment to a changed incentive struc-

ture (allocation mechanisms in centrally plannedImport versus export reform. The evidence economies, and parastatal domination of agricul-

suggests that developing countries have bene- tural markets, as with many export crops in Af-fited economically from a combination of ex- rica).change rate depreciation and commercial policy * Growing protection in international marketsreform. The stimulus to exports and output from in the 1980s has depressed world prices and re-a real devaluation combined with reductions in duced market access, reducing the response ofexport restrictions and measures for export de- exports, especially in agriculture. For manufac-velopment are likely to be more immediate than tured exports, industrial countries are promisingthose from a real devaluation combined with im- markets because of low tariffs, but nontariff bar-port liberalization. At the same time, efficient, riers in some important product categories (tex-longer-term development of exports and output tiles, clothing, and steel) have hurt the exportdepends not only on export policies but on im- growth of developing countries.port liberalization. The analysis supports the * Credibility of reforms, which affects theirneed to emphasize a combination of export and sustainability, depends on the country's trackimport policy reform as a complement to ex- record in policy reform, on the effectiveness ofchange rate and macroeconomic adjustment.9 Al- the initial steps, on the macroeconomic stabilitythough import liberalization is often expected to of the economy, and on the consistency with othercause short-term unemployment, a recent study reforms (such as those for the financial sector andof 19 countries found no clear empirical evidence for agricultural pricing).linking the two in aggregate. There is, however, * When entrepreneurial and managerial capac-some evidence in another study suggesting that a ity are underdeveloped, the supply response isreal devaluation is associated with decreases in inevitably slower. Shortages of trained labor andreal wages, particularly those of low-income la- poorly developed input supply lines have also

been serious problems.

6

Sequencing and Timing of Reforms

Consistency of liberalization with stabilization. One ation is highly unstable. The foregoing para-issue is whether the liberalization is inconsistent graph shows that trade policy reform and stabili-with stabilization efforts - whether tariff reform zation, when carried out in parallel, have in mostmay lead to revenue losses, devaluation may in- instances been successful. But if inflation is verycrease inflation, and liberalization may aggra- high and variable, leads and lags in the move-vate balance of payments problems. Indeed, there ment of individual prices mean that the resultingis little doubt that macroeconomic instability relative prices are a poor guide for economicmakes trade (and other) reforms more difficult to decisions. In addition, the real exchange rate isimplement successfully. For this reason, some likely to appreciate and thus conflict with tradeanalysts argue that fiscal deficits and inflation reform goals if the authorities use the exchangerates should be reduced before introducing trade rate (rather than adequate macroeconomic poli-policy reforms. In practice, however, the strong cies) as a "brake on inflation." Thus, aspects oftrade policy reformers have also generally man- trade reform whose effectiveness depends on rela-aged to reduce simultaneously the fiscal deficit, tive price changes are unlikely to succeed untilthe inflation rate, and the balance of payments very high rates of inflation are brought down.deficit more than have the weaker reformers inthe sample (table 2). For one thing, substituting Interaction of trade and fiscal reform. A vari-tariffs for quantitative restrictions has been bene- ety of trade reforms complement the fiscal ad-ficial from the fiscal viewpoint. Furthermore, justment. Eliminating nontariff barriers - espe-where the fiscal deficit has been sufficiently re- cially converting them to equivalent tariffs -

duced and the real exchange rate depreciated, and eliminating tariff exemptions are revenue-the current account deficit has also declined de- enhancing (Jamaica, Kenya, and Mauritius).spite import liberalization. In these circumstances, Reducing tariffs and harmonizing them can beimport liberalization can reduce inflation and revenue-neutral or revenue-enhancing if the lowercontribute to stabilization by providing much tariff rates are offset by a more depreciated ex-needed competition in the domestic markets. De- change rate. And reducing very high tariff ratesvaluation raises the domestic prices of tradables can increase trade tax revenue if tariff evasionand can fuel inflation; but an adequate reduction rates fall or if import demand is price elastic (thatin the fiscal deficit can lower inflation under a is, if actual tariff rates exceed maximum-revenuedevaluation. tariff rates). Such increases in tariff revenue can-

not be relied on, however. In a sample of coun-Effectiveness of trade reform under instability. tries that primarily reformed nontariff barriers

A second issue is whether trade policy reforms without lowering tariffs, tariff revenue increasedwill be productive when the macroeconomic situ- from 2.7 percent of GDP to 3.4 percent. But in a

7

Table 2 Macroeconomic Indicators Before and After Reform In Trade Adjustment Loan Coun-tries with Implementation Data (unweighted average for each group In percentages)

3 years 2 years 1 year Year of 1 year 2 years 3 yearsIndicator before before before program after after after

Inflation rateSignificant reform 31.5 34.3 30.6 55.5 25.9 22.9 22.6Significant reform 30.6 33.0 26.6 48.9 20.3 17.4 17.0Moderate reform 12.4 11.8 12.3 93 8.9 8.1 7.6Mild reform 15.5 15.7 15.3 17.4 14.8 16.9 19.3

Fiscal balance/GDPSignificant reform -4.8 -6.4 -7.8 -7.2 -6.1 -4.4 -4.6Significant reform -5.1 -6.4 -6.5 -7.1 -5.9 -3.6 -2.6Moderate reform -7.2 -7.8 -6.0 -5.8 -5.4 -5.1 -4.7Mild reform -8.0 -6.8 -8.6 -8.9 -8.4 -8.0 -13.8

Resource balance/GDPSignificant reform -5.2 -3.4 -2.5 -1.5 04 -0.7 -1.1Significant reform -5.6 -3.5 -3.6 -3.1 -0.7 -1.5 -1.9Moderate reform -8.8 -8.6 -7.1 -6.4 -7.1 -6.0 -4.4Mild reform -6.2 -9.9 -7.5 -7.8 -6.4 -6.4 -3.2

Note: Extent of reform (1980-87) is based on a combination of changes in policies (high, moderate, or low) with respect toexchange rate depredation and commercial policy reforms. Countries in each group are as follows: significant (high in bothcategories or high in one and moderate in the other): Chile, Colombia, Ghana, Jamaica, Korea, Mauritius, Mexico, and Turkey;moderate (moderate and moderate, or high and low): Bangladesh, Madagascar, Morocco, Pakistan, Panama, Philippines, andThailand; and mild (others): Cote d'Ivoire, Guyana, Kenya, Malawi, Senegal, Togo, Yugoslavia, Zambia, and Zimbabwe. (Mildincludes countries that reversed reforms.)a. Exdudes Mexico, for which changes in operational deficit is a more meaningful measure of fiscal effort.Source: World Bank data.

sample of countries that reduced tariffs as well as plementary effects: the benefits of trade policyimplementing other reforms - among them reforms are usually greater when accompaniedMexico, Morocco, the Philippines, and Thailand by internal reforms. But successful trade reform-- revenue fell on average from 2.8 percent of ers have not waited until all complementary re-GDP to 2.3 percent. The fiscal effects of a devalu- forms and infrastructural investments are in place.ation in general depend on whether the govern- In fact, the initiation of trade reforms often expo-ment is a net buyer of foreign exchange (Ghana, ses the need for domestic market reforms and in-Sierra Leone, Somalia, Uganda, and Zaire) or a vestments (Madagascar, Mexico, Tanzania, andnet seller (Nigeria). In countries significantly de- Zaire)."0 It also exposes the need to meet unfore-pendent on tariff revenues, therefore, the reve- seen infrastructural demands for industries basednue effects of specific trade reforms involving almost entirely on foreign demand (such as grapestariff reductions should be evaluated before im- in Chile; cut flowers in Colombia, and color tele-plementation. Measures to reduce expenditure vision sets in Korea.) Sometimes internal reformsor enhance revenue from other sources (such as should even be deferred until it is clear to theconsumption taxes) will need to be implemented business and financial communities that importto avoid any detrimental fiscal effect. Mexico protection will come down. Otherwise, if invest-generated additional revenue through tax reform ment or price controls are removed in highlywhen trade taxes fell; Morocco did not generate protected sectors, increased investment and pro-new revenues, leading to a partial reversal of duction might be encouraged in the wrong sec-reform. In general, if tariff reform would exacer- tors. Conversely, trade policy reform may inbate the fiscal deficit and if that deficit is unduly some cases need to wait until an internal controlhigh, offsetting fiscal measures are necessary. is relaxed. For example, a processed product

(such as textiles) may become rapidly dispro-Sequencing trade and internal sector reforns. tected if its tariffs are reduced while the price of

In general, trade and internal reforms are best its basic input (cotton) set by a monopolistic par-carried out simultaneously because of their com- astatal remains high.

8

The order of trade policy measures. With a revenue needs, however, nontariff barriers couldsubstantially overvalued exchange rate, priority be phased out without equivalent tariffs.should go to measures to achieve and maintaina real devaluation." Making many quantitative The pace of reform. Expeditious reformimport restrictions redundant and facilitating avoids a drawn-out reform process that allowstheir removal, large devaluations have often pre- opponents time to organize and lobby for a re-ceded or accompanied the rapid removal of a versal. It also avoids difficulties in importinglarge number of quantitative restrictions (Bo- intermediate inputs and capital goods, whichlivia, Chile, Ghana, Laos, Mexico, Nigeria, Sri would interfere with the restructuring that is ex-Lanka, and Zaire). Such a shift from commer- pected to occur in the initial phase of liberaliza-cial policy protection to "exchange rate protec- tion. The sooner the benefits of reform begin,tion" is a major step toward neutrality in incen- the better the prospects for sustainability. Sometives between and among exportables and im- successful reforms have been comprehensive, in-port substitutes. Introducing other export pol- tensive, and fast, as in Bolivia. Mexico quicklyicy reform shortly before, or at least at the same reduced the coverage of quantitative restrictionstime as, import reforms permits an earlier ex- and reduced tariffs in about two years. Chile'sport supply response and allows unification of phasing out of quantitative restrictions was rapid,the tariff structure to proceed without burden- while tariff reductions ran over five years. Whening exporters. Import policy reform often starts implementation is spread over a few years toby replacing nontariff barriers with tariffs pro- give affected activities time to adjust, it is desir-viding roughly the same protection. This step, able to announce the trade reforms in advance,as well as eliminating tariff exemptions, im- as Chile did with its tariff reforms. However,proves resource allocation, increases transpar- Korea carried out its comprehensive reforms overency, reduces rent-seeking, and helps to improve 20 years, with substantial import liberalizationthe fiscal situation. These steps ought to be fol- since 1980. While the decision on the pace of im-lowed by a rationalization of the tariff structure port reform depends on country circumstances,to provide more uniform incentives. This ra- experience suggests that a substantial and com-tionalization should usually be accompanied or prehensive liberalization can be done in less thanfollowed by a reduction in tariff rates to reduce five to seven years from the start of the adjust-protection, while any significant adverse effects ment program - including major and decisiveon the fiscal deficit are offset. Depending on actions in the first year.

9

4Trade Policy Measures

Exchange Rate Policy Export Policy

Exports and import substitutes. The real exchange Prerequisites for manufactured export growth. Therate should help to attain equilibrium in the bal- macroeconomic stability of low fiscal deficits, lowance of payments and domestic markets and be inflation rates, and stable and adequate exchangecompatible with growth in tradables and output rates has been the hallmark of East Asia's eco-over the longer term. An overvalued domestic nomic success. Relatively low protection of im-currency indirectly taxes exportables and lightly port substitutes helps to sustain a lower real ex-protected importables and favors nontradables change rate than would otherwise be the case. Itand importables protected by binding restrictions. also makes it easier to administer schemes thatThe uncertainty of fluctuations in the real ex- exempt exporters from restrictions and tariffs onchange rate also hurts exports. A real devalu- their imported inputs. A few East Asian econo-ation, accompanied by exchange rate unification mies have nevertheless been successful withwhere relevant for different goods, improves the import protection. They have done this by avoid-incentives for exports and efficient import substi- ing exchange rate overvaluation and by usingtutes.12 A devaluation should be accompanied export measures to offset the antiexport bias fromby macroeconomic policies to restrain inflation import protection. But Korea's approach duringand sustain the real exchange rate. A crawling the 1960s and 1970s would be difficult for otherpeg system - with supportive macroeconomnic countries to replicate in today's world economy.policies that avoid real exchange rate apprecia- The approach included export subsidies, whichtion - helped many countries to prevent domes- other countries would countervail today. Rent-tic inflation from offsetting the nominal exchange seeking activities viewed as incompatible withrate adjustment (Brazil, Chile, Colombia, and export growth were vigorously suppressedTurkey). Cote d'Ivoire's currency, like that of through government intervention. Most reform-other countries in Francophone Africa, is pegged ing countries in the 1980s have carried out someat a fixed rate to the French franc. Its reform import liberalization, supported by adjustmentprogram floundered in part because a simulated lending and IMF programs. About a third of thedevaluation using import tariffs and export sub- countries that have received trade adjustmentsidies was not fully implemented and proved to loans increased their share of exports to indus-be a poor substitute for devaluation. trial countries (table 3).

10

Table 3 Exports of Nonoli Developing Countries as a Share of Exports from DevelopingCountries to Industrial Countries, with Selected Country Examples (percentages)

Export share (%)Number ofCategory Countries 1981 1988

Nonoil developing countries 74 100.0 100.0Trade adjustment loan countries 37. 55.9 59.5

With rising share 12 30.4 42.4Korea 9.8 18.5Turkey 1.7 2.9Ten others 18.9 21.0

With declining share 25 25.1 16.9Zambia 1A 0.7C6te d'Ivoire 1.6 0.7

Nontrade adjustment loan countries 37b 44.1 40.5With rising share 9 12.3 17.5China 8.4 11.8Portugal 2.7 4.2Seven others 1.2 1.5

With declining share 28 31.8 23.0Peru 1.9 0.9Sudan 0.3 0.1

Note- Exports of the 75 nonoil developing countries in the sample of 88 countries considered in this report as a percentage of exports from alldeveloping countries OME definition) to industrial countries.a. The forty trade adjustment loan countries exduding Indonesia, Mexico, Nigeria which are oil exporters.b. The forty-seven non-trade adjustment countries exduding ten oil exporters.Source: IMF, Directon of Trade Statistics.

Imported inputs used by exporters. Import provide duty waivers (and exemptions from otherprotection biases against exports by driving up import restrictions) or temporary admissions ofthe exchange rate and making import substitu- imported inputs (India, Indonesia, Mexico, Mo-tion more profitable. While exporters face world rocco, and Turkey). For small or irregular ex-prices for their output, import protection increases porters for which waivers or temporary admis-the costs and reduces the availability of the in- sion schemes are impractical, a quick, reliableputs used in exports. This bias can be partly system can use drawbacks or rebates of dutiesoffset by schemes to reduce input costs. A lesson and indirect taxes actually paid (India; Korea;from the East Asian experience is that giving di- Taiwan, China; and Thailand). But collectingrect and indirect exporters restriction-free access and refunding duties is less efficient than waiv-to inputs at duty and tax-free international prices ing duties, and drawbacks do not offset nontariffis particularly effective.1 3 One way is to have an barriers.essentially free trade regime, with no tariffs or re-strictions on imports (Hong Kong and Singapore). Other alternatives and costs. A duty-This eliminates the need for schemes to insulate free scheme to export firms that allows in-exporters, which have administrative require- bond manufacturing plants to locate almostments that are difficult to meet in some countries. anywhere can be provided (Mauritius, Mex-In regimes with import protection, one approach ico). An alternative, used in more than thirty de-that can be used for larger firms that import in- veloping countries, is to establish physically sepa-puts for export and domestic production is to rate export processing zones. However, many of

11

these zones have proved to be poor investments Exports of commodities. Exports from pri-as a result of unwise location, high investment mary sectors are frequently discouraged by taxes,costs, mediocre management, or uncooperative an overvalued exchange rate, low administeredcustoms officials, but the best ones have done prices, and inefficient government marketing mo-well. Duty-free schemes for exporters' inputs nopolies, as well as by industrial protection andalso involve costs, such as drawing resources from restrictions on foreign investment. For some keymore efficient activities, temporarily increasing a agricultural products that compete with temper-fiscal deficit," penalizing domestic suppliers of ate zone agriculture, export growth is also con-importable inputs, and creating new opportuni- strained by industrial countries' protection. Forties for rent-seeking. The schemes offer prag- others, export growth is constrained by the slowmatic ways to offset import protection, but their growth and price inelasticity of demand. Manybenefits need to be balanced against their costs countries have removed some of these obstacles.for revenues and other economic activities. Ex- Malaysia in the 1960s and Chile in the later 1970sport subsidies have also been successfully used created a positive policy environment for pri-by a few countries (Korea), but in general they mary exports, with good results. In the 1980s Bo-are seldom efficient and are likely to be counter- livia and Ghana opened mining to foreign invest-vailed by other countries. ment. Bangladesh, Cote d'Ivoire, Ghana, Malawi,

Philippines, and Turkey improved producerSupporting actions for manufactured exports. prices for leading primary product exports by

Exporters of manufactures must meet exacting eliminating direct or implicit taxes. Argentinaand frequently changing requirements and must and Uruguay reduced export taxes, but the ac-deliver their products reliably and on time. To tion was quickly reversed in Argentina for rea-do this, they need support in efficient infrastruc- sons of revenue. Colombia, Mexico, Morocco,ture and telecommunications, readily available and Tanzania reduced regulatory controls onexport credit, technology development, quality exports. Malaysia and Thailand achieved sus-control, production planning, and trade logistics. tained and strong growth in primary exports byThe East Asian experience suggests the value of avoiding major currency overvaluation, heavyrelaxing regulations for all firms on layoffs, fringe taxation of the sector, and high protection ofbenefits, minimum wages, and collective action, manufacturing industries. Ghana, Madagascar,to reduce labor costs and increase flexibility at Mali, Morocco, Nigeria, and Tanzania eliminatedthe enterprise level.15 Industrial location and public sector marketing boards or stripped themregional development policies may also have to of their monopoly procurement powers. Suchbe changed, since exports on a large scale cannot reforms can significantly increase primarybe expected from backward areas with poor in- exports. Cross-country evidence indicatesfrastructure. It may also help to assist exporters an exchange rate elasticity for primary ex-in securing technical assistance services from ports almost as large as that for all mer-consultants and information suppliers of their chandise (including primary) exports; thechoice. Much of the Bank's technical assis- first elasticity is even larger than the secondtance to exporters has been channeled through in a sample of Sub-Saharan Africa countries.official export promotion organizations, withdisappointing results. Foreign firms can also Export diversification. Although primaryprovide a good source of capital and technol- products have in some cases contributed much toogy. Policies attractive to foreign investors exports and incomes, for exporters of tropicalinclude macroeconomic stability, protection primary products as a whole, significantly greaterof property rights (including intellectual export growth will also require export diversifi-property rights), a stable and transparent cation. Elements of agricultural diversificationregulatory environment, and liberal access include: research, seed selection, access to tech-to foreign exchange for profit remittances nical implements, cold storage, marketing, andand imported inputs and services. This kind foreign distribution. Wide price fluctuations ofof good climate for investment is likely to be primary commodities in the world markets aresuperior to special incentives, such as tax holi- also a concern, but beyond the scope of this re-days, which may attract footloose industries that port.leave when the holiday is over.

12

Import Policy the advantage of being less subject to lobbying.Some of the more successful reformers (Bolivia,

Nontariff barriers. Import licensing, prohibitions, Chile, and Mexico) have converged their tariffexemptions, quotas, official reference prices, and structures toward 15 percent, in addition to nearlyforeign exchange allocation schemes are common eliminating quantitative restrictions, while somenontariff barriers. Because they depend on dis- others have reduced tariffs to below 30 percent.cretionary decisions by the authorities, they make For uniformity to be strictly optimal, however, itthe system less transparent and predictable and may be necessary to supplement uniform tariffsencourage lobbying, corruption, and rent-seek- with consumption taxes to minimize consump-ing. Even with little or no decrease in protection, tion distortions. Although uniformity minimizesa reduction of nontariff barriers can have major production distortions for a given protection levelsalutary effects. One simple reform is to switch for importables, raising low rates encouragesfrom a positive import list (which allows unli- domestic production of products whose rates arecensed imports only of listed items) to a negative raised, perhaps drawing resources from exports.list (which allows unlicensed imports of all items If low rates on inputs are to be raised, exportersnot listed). This was the first major step in Korea's would need to be insulated from paying pricesliberalization program in 1967. Auction systems above world levels for these protected inputs.can sometimes substitute for administrative ra-tioning. In quantitative quota systems, quotas Methods of tariff reform. Among the pathscan be auctioned, with the quota amount in- to a relatively low and uniform tariff structure,creased until its protective value falls to zero, at the most difficult to implement seems to be an in-which time it can be abolished. Alternatively, dustry-by-industry approach, since changes intariffs providing roughly equivalent protection one industry may have repercussions in others.can be imposed on product categories as nontar- What seems to be better is a "concertina" ap-iff controls are eliminated. This approach re- proach, whereby at each stage all the top rates areestablishes the link between domestic and inter- collapsed to the next highest level. Even better isnational prices, ensuring that they move in the a "radial" reduction, in which all rates at eachsame direction and do not diverge by more than step are cut to an equal fraction of their previousthe amount of the tariff. level, thereby reducing protection as well as tariff

rates at each step. While radial tariff reductionStructure of tariffs. On efficiency and po- promises faster production efficiency gains than

litical economy grounds, a relatively low, rela- the concertina approach, it is more likely to re-tively uniform tariff structure is preferred among duce revenue in its first stages.17 A combined ap-feasible options. Because tariffs on finished prod- proach might thus be the best path to greateructs are usually higher than on intermediates uniformity: collapsing the very high rates, andand raw materials, and because tariff exemptions radially reducing all other rates - subject to theare common, effective protection varies greatly revenue constraint.across industries. In most countries, productionefficiency requires that effective protection be re- Policies toward Trading Partnersduced, and that protection be rationalized amongimports, taking into account the protective effect Multilateral negotiations. Newly industrializedof the domestic tax system. But tariffs also gener- countries have much to gain from reduced exter-ate revenue. By coordinating tariff reform with nal barriers to their exports. They also have somedomestic tax reform, deeper reductions in tariffs leverage in the Uruguay round negotiations sinceare more possible than otherwise. The reduc- the industrial countries want them to open theirtions should eventually result in a low, equal rate markets. In contrast, countries interested in agri-of tax on consumption of imports and domesti- cultural issues may need to negotiate as a groupcally produced products.16 Raising low tariff rates if they are to have leverage. One issue for devel-(usually on inputs) also increases revenue, allow- oping countries, particularly those with some lev-ing high rates to be reduced further, and makes erage, is whether to reduce barriers unilaterallyeffective protection more uniform between in- or to delay reforms in order to gain concessionsputs and finished goods. In general, a relatively in multilateral negotiations. The issue could below, relatively uniform tariff structure also has resolved if all negotiating parties in the Uruguay

13

Round were to declare unambiguously that credit of consumers in the industrial countries andwould be granted for unilateral reductions of threaten the world trading system. It is thus inbarriers. This issue is currently being addressed the interest of all countries that industrial coun-by some negotiating groups in the Round, though tries act forcefully to reform these policies, im-it is not yet clear what, if any, mechanism will be proving global welfare.developed. An alternative is to bind tariffs at ahigher level than the actual level, and to offer to Regional integration. The potential for ex-reduce the bound level during negotiations. But panding trade with neighbors has led some coun-this approach requires a credible threat to raise tries to form regional groups. These groups weretariffs to the bound level if negotiations fail, as expected to allow members to realize gains fromwell as a credible commitment not to raise the increased trade, to take advantage of economiesactual tariffs - by resorting to article XVIII - if of scale by enabling them to produce for a re-negotiations succeed. For most countries, the gional market, and to provide initial exportingcosts that their trade policies impose are likely to experience under protection. But intraregionalbe higher than the costs imposed by other coun- trade expanded little or sometimes even fell. In-tries' barriers, an argument for unilateral reforms. dustries established as a result of integration

usually had high production costs, and experi-Industrial countries. Industrial coun- ence gained in markleting to neighbors proved

try tariffs have been reduced from an aver- less than useful for exporting to wider markets.age of 40 percent in the late 1940s to less And most regional groups raised barriers againstthan 5.5 percent today. But nontariff barri- extraregional trade, discouraging integration intoers have increased, with the proportion of the world economy, where the gains from tradedeveloped country imports affected by non- are likely to be greater. Despite the shortcom-tariff barriers nearly doubling over 1966- ings, integration efforts continue, more success-86. More than 90 percent of OECD imports fully among countries with generally outward-of foodstuffs are now affected by some type of oriented economies (ASEAN or the Europeannontariff barrier. This change, coupled with the countries). Two lessons from the experience withsurpluses resulting from high OECD agricultural integration efforts are noteworthy. First, integra-support prices, has distorted and destabilized ag- tion schemes should focus more on improvingricultural markets. Although quotas are some- infrastructure and factor mobility than on tradetimes a problem (especially in textiles and steel), policy measures. Increased trade would followindustrial country markets remain attractive for naturally. Second, any trade policy measuresa wide range of manufactured exports. Nonethe- should focus on reducing barriers to all trade, notless, the nontariff barriers and agricultural poli- just trade among members. The Central Ameri-cies in the industrial countries reduce the poten- can Common Market, for example, has explicitlytial benefits from trade reforms by developing recognized the need not to impede member coun-countries and make reforms politically more dif- tries' progress in overall trade reform.ficult. Studies show that they reduce the welfare

14

5Complementary Policies

Fiscal policy. Fiscal and trade policy should be co- on guarantees of high protection. Liquidationordinated to avoid exacerbating the fiscal deficit would probably be preferable to privatization inand overvaluation of the real exchange rate. Fis- these cases. In socialist countries, trade liberali-cal policy can also complement trade reforms by zation needs to be accompanied by phasing outmaking tax rates on domestically produced final the central planning and allocation mechanisms,goods equal to tariff rates on their imports, re- thus allowing the new market signals to be effec-ducing protection, raising revenue, and allowing tive for firms and farms (Poland). Parastataltariff rates to be reduced further (Malawi, Nige- domination of crop output markets might meannra, and Togo). Fiscal policy could also comple- that the effects of devaluation on producer pricesment trade reform by ensuring that public in- are realized very slowly while input prices risevestment supports the reforms. Public invest- quickly. Or it might mean that a protected proc-ment budgets have fallen in many countries (C6te essed product (such as textiles) becomes rapidlyd'Ivoire, Mexico, Morocco, and the Philippines), disprotected if its tariffs are reduced while thewith expenditure cuts concentrated on the capi- price of a basic input (cotton) remains high. Mean-tal account rather than on the current account ingful trade liberalization in such cases may call(with its overhead expenditures and frequently for abolishing the parastatal (Ecuador) or elimi-high interest components). Efficient investments nating its legal monopoly in the import marketin infrastructure, and expenditures for research (Mexico). A corrupt or inefficient customs serv-and extension services, are important to get full ice can also reduce the response of the trade sec-advantage from increased trade incentives. Some tor to reforms, calling for improvement as greatersuccessful reformers have raised the share of reliance is placed on tariffs. In many cases, ad-public investment (Chile, Korea, and Turkey); ministrative problems have led to delays in theothers have lowered it. In either case, the key is introduction of tariff reforms, export tax rebates,to ensure that the investments are efficient and duty relief systems for exporters, and bondedappropriate to support the adjustment to policy warehouses.reforms.

Regulatory policy and the private sector. IfPublic sector policy. The protection of state- market exit or entry is difficult, inefficient firms

owned manufacturing enterprises has interfered may linger, and new firms may not start up.with liberalization programs (Argentina, Bangla- Regulations that make it costly for firms to re-desh, Chile, and Peru). In other cases where structure or shut down have been a factor ingovernments have privatized unprofitable firms failed liberalization attempts in Poland, Turkey(as with Togo's steel mill), buyers have insisted (in the early 1970s), and Yugoslavia. By contrast,

15

an absence of controls inhibiting firms' ability to Deregulation and competition. Financial sec-restructure or close down was important to the tor regulations that encourage or enable banks tosuccess of the 1974-79 trade reforms in Chile, car- continue to lend to bankrupt enterprises (whichried out concurrently with the reduction or elimi- must exit if the economy is to reap the efficiencynation of many regulatory interventions, particu- gains from trade reforms), may mop up the sup-larly in the labor market. In other countries ply of new credit to firms that should be expand-(Mexico until 1988), regulations governing entry ing after trade policy reforms. Regulatory re-of new firms and expansion of established firms form, combined with support for restructuring inapparently slowed the pace of adjustment. Price the financial and industrial sectors, could mag-or wage controls are incompatible with trade pol- nify the benefits of trade policy reforms. But a re-icy reforms whose purpose is to alter relative cent assessment of competition-promoting poli-prices. Thus in the presence of severe labor mar- cies suggests that the Bank's lending and policyket controls, firms may have to shed labor or dialogue have not sufficiently emphasized do-close down in response to import competition mestic regulatory barriers. Only 2 percent of ad-even though the workers could have been prof- justment operations have included policies re-itably employed at lower wages, while industries lated to entry and exit. Recently, however, sometrying to expand may be unable to bid labor away advanced trade policy reformers (Mexico) havefrom contracting sectors with high minimum begun deregulation programs.wages.

16

6Credibility and Sustainability

Political economy. If the private sector is to invest pean Community began lowering barriers to tradein new sectors, it must believe that the changed with the outside world in the 1950s, but it has yetincentives will be sustained. If not, firms in pre- to be tried in the developing world.viously protected sectors may invest in lobbyingefforts and go deeply into debt trying to "ride out Compensatory measures. Successful tradethe storm" until their protection is restored. To policy reform, despite its associated net benefits,be credible, the first steps of reform should gen- can have short-term transitional costs. Someerally be clear and decisive: reforms begun with segrnents of the population may become worsetentative steps have often been reversed. Public off. Steps to partly compensate losers may in-commitment of the head of state through a strong crease the odds that the reforms will be sustainedannouncement of the program can also be impor- and bring other benefits as well. Some compen-tant in establishing credibility. And a general satory measures, such as worker retraining, caninterest agency (central bank or finance ministry) improve factor mobility, speeding the intersec-is usually more reliable than one with specific toral adjustment. Other measures, such as anti-protectionistic interests (ministry of trade or in- dumping procedures (set up in Chile, Mexico),dustry) in executing a reform program. Credible can reduce resistance to the reduction of moreannouncement of a timetable - while carrying costly forms of protection. Devaluation can alsothe risk of giving the opposition time to mobilize be viewed as a measure to partly compensate foragainst the reform - can usually strengthen the the loss of protection, and thereby reduce politi-reform if the timetable is adhered to (Korea). cal resistance. Other steps, such as targeted foodReforms are generally easier to introduce after a assistance programs and employment programs,crisis that discredits old policies. Since the crisis can offset the transitional effects of adjustmentis often related to the balance of payments, a measures on real wages and employment. Often,strong devaluation and macroeconomic adjust- however, workers displaced from protected in-ment is probably necessary and useful in sending dustries are not among the poorest groups in thea signal to producers, whose supply response society. Moreover, new programs run the risk ofwill help to justify the program. Sustainability creating new distortions and exacerbating fiscalmay also be enhanced by an external commit- deficits. But the compensation issue needs to bement to maintain reforms, such as joining the addressed, and pragmatic means found to targetGATT, which raises the costs of reversing the programs well. A UNDP/World Bank pro-reforms.18 In some cases, reforms may be more gram has been providing technical assistance topolitically acceptable, credible, and sustainable if countries on trade reforms, including the ques-carried out under regional auspices. This appar- tion of transitional costs.19

ently was a successful approach when the Euro-

17

Notes

1. Trade policy reforms are expected to in- tions can be costly, even though a mild and tem-crease exports and improve the balance of pay- porary overshooting of neutrality might be justi-ments. Nevertheless, a higher trade deficit might fied in order to encourage resource reallocation.accompany the reforms initially because exportsmight not respond as quickly as imports in the 6. Through June 1989, there were 98 loans toshort term. 44 countries that contained significant trade pol-

icy components.2. On the other hand, a case is made in some

of the recent literature for strategic targeting of 7. Among the 40 trade loan recipients, im-government interventions as means for increas- plementation data were available for 24. De-ing export success. tailed findings on implementation refer to the 24,

while aggregation data were also considered for3. For the most part, the report considers the 40 as well as for 47 nonrecipients.

policy changes during 1979-87 and country per-formance during 1979-88. This analysis is in- 8. Usually the estimates compare the realtended to complement and extend the previous effective exchange rates (taking into accountWorld Bank work on the long-term experience import tariffs and export subsidies) for export-with trade policy presented in M. Michaely, D. ables versus that for importables, in addition toPapageorgiou, and A. Choksi, Liberalizing Foreign comparisons of domestic relative prices.Trade: Lessons of Experience in the Developing World(forthcoming); and World Development Reports, 9. Real exchange rate adjustment and export-1986 and 1987. related reform were primarily beneficial in some

cases examined (Pakistan and Thailand). Almost4. Such liberalization enhances welfare by all examples from the 1980s of import policy re-

reducing the economic costs of discretionary trade form also involved a real exchange rate deprecia-controls, such as rent-seeking, corruption, and tion, and this combination was beneficial (Chile,induced distortions in domestic markets. Jamaica, and Mexico).

5. For example, in the face of pervasive dis- 10. To take one example, deficiencies in truck-tortions, some types of partial trade liberalization ing and port regulations in Mexico became morecan be welfare-reducing. Similarly, ill-designed evident when expanding exports increased theexport subsidies or measures to go well beyond demand for transport services.neutrality to a pro-export bias through interven-

18

11. Countries with multiple exchange rates in lish a full range of industries that provide inter-the goods market can gain from unifying them at mediate inputs at costs and prices below worldthis time. trade prices, based on highly efficient technol-

ogy, location scale, and production operations.12. A devaluation, of course, should not be

carried out strictly as an export promotion meas- 16. Equal tax rates on imports and domesticure. Competitive devaluations designed simply production, or alternatively consumption, of luxu-to undercut competitors on world markets should ries would be preferable to the use of importbe avoided. Rather, devaluation should be con- restriction alone, if the objective is to discouragesidered a means to restore equilibrium in internal the consumption of such items.and external markets and encourage long-rungrowth. 17. In contrast, the concertina approach con-

centrates initial reductions on very high rates, at13. This avoids wide variations in effective least some of which may be so high that reducing

incentives between different exports which use them will increase import volume and tariff reve-inputs subject to different import controls and nues.tariffs. It is not subject to the countervailingmeasures which importing countries are increas- 18. However, the value of this commitment isingly applying to direct or indirect export subsi- decreased by the easy access developing coun-dies. tries have to GATT provisions that allow them to

impose barriers for purposes of correcting bal-14. Short-run negative revenue effects may ance of payments disequilibria or protecting in-

occur when protection of inputs is principally fant industries.provided by tariffs. Tariff revenue should in-crease, however, as expanding exports increase 19. The UNDP/World Bank technical assis-the supply of foreign exchange for imports. tance program for trade expansion has been in-

volved in Madagascar, Mali, Morocco, Poland,15. An ambitious but effective strategy used Uganda, and Uruguay.

by Korea and Taiwan, China has been to estab-

1

Distributors of World Bank PublicationsARGENTINA FINLAND MALAYSIA Forbscrpii arorieCatro Hd, BSRL Akateemine Krjklarupp Univdyd of Malya Coopera it Internaitnal Subription ServiceGaler,a Guezse P.O BoX 125 oadabhp, Limited P.O. ox 42095

lorids 165, 4th FloorOfk 453/465 SFLOI0I P.O. So 1127, Jan Pant EaBr Craighall1333 Eurnos Air Hetsoki 10 Ki-le Lumprr Johannebhu 224

AUSTRALIA,PAPUANEWGUINEA, FRANCE MEXaCO SPAINFIJ,SOlOMONISLAND% Waid SankPubtiitosa 1f EC MundtPrnsaatubr, SA.VANUATU, AND WESTERN SAMOA 66, aren dlnra Apatado PoNtal 722-60 C_ello 37DA. Sooks &Journal 75116 Pais 14060Tapn.MedtoDY 25801 Madrid11-13 Stalion iSetMifcan 3132 GERMANY, FEDERAL REPUtlIC OF MOROCCO Ilberd Inaonauional AEDOSViorbi UNO-Vedag Sodete crEtudes Marketing Maaine Cauel1 de Cent, 391

Po.ppadaefe Aller 55 12rueMozar,Bd d'Anfh 01(099 BroelmsAUSTRIA D4-il0 H,a 1 CablarroGoedd and Co. SRI LANKA AND THE MALDItVSGraben 31 GREECE NETHERLANDS Lake Horis BoahopA-1011 Win KEME InOr-PubPbhk bv P.O.B244

24, Ippodamou Stret lads Platir P.O. Box 14 100, Sir Chitta-palm A. GardinerBAHRAIN Athen-11635 7240 BA Lodhem MawaltraBhadrin Resardh sd Co.s-tany Colombo 2

Asociaes Ld. GUATEMALA NEW ZEALANDP.O. Bo 72103 LiUrerts Piedra Saa Hill. Ubrary ad Infoaon Servire SWEDiENMarama Town317 CerooCultural PiedraSanta Private Sag Forsigletites

11 cale 6-SDzo 1 Ne Mkt Prite FPsxbo}stragetBANGLADESH Guste-raa City Aucdknd Regierrgsgabn 12Z Bgx 16356Minro Inodr. Derdopotent S-103 77 Stodtkhdr

Aaiatance Srddy Q(IDAS) HONG MONG, MACAO NIGERIAHouse S, Rnod 16 Ada 2D09 Ld. Univty Pres Limited Fr i orDhIaorond. R/Are Morg,oak Pot Office ThreeCrownoBuildiogjerirho Wernetrgrn-WlliamaABDhkb l209 ButStreet No 37 Prtv-teMMaiBagS095 B-B30Oa 4

Mrgart, Kowloon Ibdart 5-104 25 StoddrnmBnudA of$ir Hong KlIg154 Nr Ahned Slak NORWAY SWITZERLANDChittagong 400 HUNGARY NHnensIrrf-mration Ceter Forrg8e titl

Kultur Bertrnd Nesen vo 2 librie Paynt76, KDA Avue P.O. Box 139 P.O Bo. 6125 Ett.stad 6 rueCGrnuKrha 1389 Budt 62 N4N602- Olo 6 C- Pos 351

CHI 217 Genera 11JELGIUM INDIA OMANPrbliralonrd,sNari-or rLlr Allied Publihe Pnvte Lid. MEMRB Inrmfton Serviros Forw&a to onAv. du Roi 202 751 Mout Road PO. o. 1613, Seb Airport Libidrie Payt1060 Brussels Mda-6000t 2 MUrK t Se-riedeAbooseneet.

Cas postal 3312BRAZIL B-Rosri': PAKISTAN CH 1002 LarannePubbiraconTermicsaInternarirmli ISJN. Heredia Mag Mioa oBk Agony

Ltd. Ballard Estate 65, Sarh--Quarid--Aam TANZANIARus Peioto GCanid, 2D9 Bray - 40D 038 P.O. Na No. 729 Oorfd Urrive-sity PreF-01409 Sao Palra SP Lahote 3 P.O. Bx 52°9

13/14 Asf AU Road Ouar BIalsaCANADA NewDe1hi-110092 PERULeDiffusreur Editorial Droo SA THAILANDCP. F5,15301 rue A- p8re 17 Chittdr,rp Aveue Apartdo 3524 Cenrrl Dpartnent StoreBoudrervilleC Quebe Calcutta -700 072 LUm 3D6 Stun RoaJ4H SE6 Bangkok

Jyidera Hosel Building PHILIPIYNESCHINA Sth Main Road Gandhinagar National Book Store TRINIDAD & TOBAGO, ANTIGUAChina _aand & broornic Publishing Barngalore- 560W 9 701 Rial Avue BARBUDA,BARBADOS,

House P.O. Na 19°4 DOMINICA, GRENADA, GUYANA,4 D. F. Si Dcngjli 3-5-1129 Kacdiguda Crmss Road MetroMarnila JAMAICA, MONTSERRAT, ST.lDjlng Hyderabad -50027 KITTS & NEVIS, ST LUCIA,

POLAND ST. VINCENT & GRENADINESCOLOMBIA Prartihana FiK 2nd Flor ORPAN Sytenrsdic StudiesUnitEnaceLids. NearThIkoreB - N-vragpura Pat YKutury i Nuki #9WatStretApartdo Aeno 34270 Ahunedabad-350R09 0-901 Warnaa CurepsBogota D.E. Trinidad, West Indiea

Patil Howe PORTUGALCOSTA RICA 16-A Ashok Marg Lirr Portugal TURKEYLib.eoeaTmj Lurknow -226001 Rua Do Caroo 70-74 Haset Kitapei AS.C.Ile 11-13 1209 Lisbon sldbl Cdded No. 469Av. FernandezCueB INDONESIA BoyoojuSarnJose Pt Indira Limited SAUDI ARABIA, QATAR bLtanbud

JI. Sam Ratilangi 37 jari BookStoreCOTE DIrVOIRE PO. lox 181 P. Box531% UGANDACenre d'Ediita et de Dibtrion Jakarta Puat Riydll 471 Uganda Borolrhop

Airiaines (CEDA) P aox 714504 BP. 541 IRELAND MIMRS Inf-orarion Slr-ies KaopalaAbidjsr 04 Plateau TDC Publihes Bmaor qf

12 NorlIh FPredirk Street Al Alas S9rt UNITED ARAB EMIRATESCYPRUS Dubain I Al DaIna Center MBMRS Gulf Co.MESRB Ibrmation SerieeS Pirst Floor P.O Boo 6097P.O BoN 2E9N ITALY P.O lox 7188 SrnjahNlrads [L Comnmirionroi Sanroni SPA Riyadh

Via Heedetto forhini, 120J10 UNITED IKNGDOMDENMARK Clla Posbie 552 HaJi Abdullh AhArsa Building Mi-minlo Ltd.Sanfnd.Litteeatrr Sl25Ee,rec XKing Khiled Street PO Box3Rooron,-Alldll P.O. Box 3969 Altdo, Hanpshire, 0134 2PGDM1970 Frederiksbeg C JAPAN Dormn England

Rates Book SviorDOMWICAN REPUBUC 37-2 Hongo 3-ne, Brkyo-ku 113 33, Morhramed Hassan Awad Street URUGUAYEditora Tailor, C porA. Tokyo PO Boox5597S Iatuto Nadcnal delLiloRerst-don e sabel 1 Catoica 309 Jeddah Sin Jose 1116Apatado Pot 2190 KENYA MontevideoSanto Dormingo AirBona Swrrice (EA.) LdL SINGAPORE TAIWAN, MYANMAR,

P.O, ox 45245 BRUNEI VENEZUELAEL SALVADOR Naio hrdernat,on Publiosion Librer- dd EetlFPsts Pre ivat Ltd Aptdo. 60337AvenidaMnriuel Enrique Arujo #3530 KOREA, REPUBUC OF 02-06 1t Fl, P-NPu Industial Carca1060-AEdifido SIA, ler Piso Pan Korea Book Caporatton Bldg.San Salvador P.O BNa 101, warngrhamurr 24 Nr Invadiatal Road YUGOSLAVIA

SER U Singipore 1953 Jugoslovenra Kn*gaEGYPT, ARAB REPUBLIC OF YU-l10WBe1grdeTrg RVpbhiksAl Abram, KUWAIT SOOTH AFRICA, BOTSWANAAl Cat Stret MEMRB nomiton Servic F-oroig title:CAiro P. Olox 5465 Orxfrd Univ-mty Pr Smath-rn

The Middle Sass Oberva PO. Box1141$ Chrwri Sureet Cape Town rMCobro

The World Bank

Headquarters

1818 H Street, N.W. x

Washington, D.C. 20433, U.S.A. i

Telephone: (202) 477-1234 zFacsinile: (202) 477-6391 0Telex: WUI 64145 WORLDBANK Z

RCA 248423 WORLDBKCable Address: INTBAFRAD

WASBINGTONDC

European Office

66, avenue d'Ina75116 Paris, France

Telephone: (1)40.69 30.00Facsimile: (1) 47.20.19.66Telex: 842-620628

Tokyo Offlice

Kokusai BuildingI-1, Marnouchi 3-chomne oChiyoda-ku. Tokyo 100, Japan z

Telephone: (3) 214-5001Facsnifle: (3) 214-3657 -3

Telex: 781-26838

0

v ;' z N U;IS r 0 1A

ISBN 0-8213-1464-5