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Abstract:
In this paper I discuss the key regulatory, market and political failures that led to the 2008 US financial crisis. While Congress was fixing the Savings and Loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac normal bank supervisory power. This was a political failure as Congress was appealing to narrow constituencies. Second, in the mid-1990s, to encourage home ownership, the Administration changed enforcement of the Community Reinvestment Act, effectively requiring banks to lower bank mortgage standards to underserved areas. Crucially, the risky mortgage standards then spread to other sectors of the market. Market failure problems ensued as banks, mortgage brokers, securitizers, credit rating agencies and asset managers were all plagued by problems such as moral hazard or conflicts of interest. I explain that financial deregulation of the past three decades is unrelated to the financial crisis, and suggest several recommendations for regulatory reform.

financial crisis, securitization, deregulation, sub-prime lending, political economy

Abstract:
Although trade liberalization has been linked econometrically and through casual empiricism to large income increases, attempts to quantify its impact in static simulation models have shown estimated gains. This paper shows that when the endogenous dynamic effects of trade liberalization are built into simulation models, the estimated gains are indeed very large. But complementary regulatory, financial market, and macroeconomic reforms are important to realize the largest gains.

Rutherford and Tarr develop a numerical endogenous growth model approximating an infinite horizon, which allows them to investigate the relationship between trade liberalization and economic growth.

Economic theory generally implies that trade liberalization will improve economic growth, and the two phenomena are positively correlated in empirical tests, but the connection is not well-substantiated in numerical general equilibrium models.

In the authors' model, an intermediate input affects aggregate output through a Dixit-Stiglitz function. Additional varieties provide the engine of growth in this framework and the existence of this mechanism magnifies the welfare costs. In this model with lump sum revenue replacement, reducing a tariff from 20 percent to 10 percent produces a welfare increase (in terms of Hicksian equivalent variation over the infinite horizon) of 10.7 percent of the present value of consumption in their central model, where the economy is assumed to be unable to borrow on international financial markets. If macroeconomic and financial reforms are in place that would allow international borrowing, however, the same tariff cut is estimated to result in a 37 percent increase in Hicksian equivalent variation. On the other hand, if inefficient replacement taxes must be used in an economy without the capacity to borrow internationally, the gains would be reduced to 4.7 percent. Larger tariff cuts-typical of those in many developing countries over the past 30 years-produce larger estimated welfare gains at least proportionate to the size of the cut.

The authors apply the model to five developing countries and estimate the impact of the tariff changes those countries plan to undertake as part of Uruguay Round commitments. Because of the dynamic effects, estimated gains are considerably larger than those found in the literature on the impact of the Uruguay Round.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to assess the impact of trade and investment on economic growth. The study was funded by the Bank's Research Support Budget under the research project The Dynamic Impact of Trade Liberalization in Developing Countries (RPO 681-40). David Tarr may be contacted at dtarr@worldbank.org.

Abstract:
The empirical analysis of the micro links between trade and knowledge diffusion allows us to distinguish among the key predictions of the theoretical literature on endogenous growth. This literature postulates that total factor productivity (TFP) is higher when trade gives access to a wider or more sophisticated range of technologies. The papers reviewed here find considerable evidence that imported technologies positively affect TFP in the importing countries, particularly in developing ones and when technologies are acquired by way of imports of intermediates. It also provides some support for the models that argue that exporting is an efficient learning channel. The role of foreign direct investment is more mixed, likely helping the economy but hurting domestic competitors. Relative factor and machinery costs, skill and technology endowments affect the choice of imported technologies. Although the access to foreign technologies has a positive impact on developing countries' TFP, overall, these countries are shown to purchase older and simpler. But governments' attempts of limiting or guiding technology selection are likely to have a negative effect on growth, because they force producers either to choose sophisticated technologies they are unable to use or they prevent them from getting the most appropriate and efficient technologies. Rather, policies aimed at promoting technological development should strengthen the absorptive capacity of importing countries by addressing the relationship of complementarity between human and physical capital.

Knowledge Flows, Technological Diffusion, Spillovers, Total Factor Productivity, Microeconomics of Economic Growth, RJV's, International Trade, Foreign Direct Investments

Abstract:
Turkey and the European Union (eu) have agreed to implement a customs union. This means Turkey will eliminate its tariffs and levies on imports of manufactured products from the European Union. Turkey will also apply the eu's "common external tariff" on imports from third countries. Turkey will be obligated by 2001 to provide preferential access to its markets to all countries to which the eu grants such access. Since Turkey is both eliminating tariffs on eu imports and reducing tariffs on imports from third countries, it will become a rather open economy in nonagricultural sectors, with tariffs below 2 percent (zero for imports from the eu and slightly over an average 3 percent for thirdcountries). And since preferential access agreements with third countries will typically be reciprocal, Turkish exporters can expect improved access to those markets.

Abstract:
Taking price changes from the Global Trade Analysis Project (GTAP) model of world trade, the authors use a small open economy computable general equilibrium comparative static model of the Russian economy to assess the impact of global free trade and a successful completion of the Doha Agenda on the Russian economy, and especially on the poor. They compare those results with the impact of Russian accession to the World Trade Organization (WTO) on income distribution and the poor. The model incorporates all 55,000 households from the Russian Household Budget Survey as real households. Crucially, given the importance of foreign direct investment (FDI) liberalization as part of Russian WTO accession, the authors also include FDI and Dixit-Stiglitz endogenous productivity effects from liberalization of import barriers against goods and FDI in services. The authors estimate that Russian WTO accession in the medium run will result in gains averaged over all Russian households equal to 7.3 percent of Russian consumption (with a standard deviation of 2.2 percent of consumption), with virtually all households gaining. They find that global free trade would result in a weighted average gain to households in Russia of 0.2 percent of consumption, with a standard deviation of 0.2 percent of consumption, while a successful completion of the Doha Development Agenda would result in a weighted average gain to households of -0.3 percent of consumption (with a standard deviation of 0.2 percent of consumption). Russia, as a net food importer, loses from subsidy elimination, and the gains to Russia from tariff cuts in other countries are too small to offset these losses. The results strongly support the view that Russia's own liberalization is more important than improvements in market access as a result of reforms in tariffs or subsidies in the rest of the world. Foremost among the own reforms is liberalization of barriers against FDI in business services.

Abstract:
Turkey stands to gain from 1 to 1.5 percent of GDP annually from the customs union arrangement with the European Union. It also stands to lose about 1.4 percent of GDP from lost tariff revenues. Applying the value-added tax (VAT) uniformly (instead of just raising it) would allow VAT rates to fall while compensating for the revenue loss from reduced tariffs and increasing the welfare gain from the customs union. Turkey and the European Union (EU) have agreed to implement a customs union. This means Turkey will eliminate its tariffs and levies on imports of manufactured products from the European Union. Turkey will also apply the EU's common external tariff on imports from third countries. Turkey will be obligated by 2001 to provide preferential access to its markets to all countries to which the EU grants such access.

Since Turkey is both eliminating tariffs on EU imports and reducing tariffs on imports from third countries, it will become a rather open economy in nonagricultural sectors, with tariffs below 2 percent (zero for imports from the EU and slightly over an average 3 percent for third countries). And since preferential access agreements with third countries will typically be reciprocal, Turkish exporters can expect improved access to those markets.

According to Harrison, Rutherford, and Tarr, Turkey's biggest gains from the customs union arrangement will come from this improved access to third country markets. Using a comparative static computable general equilibrium model of Turkey, they estimate that Turkey stands to gain between 1 and 1.5 percent of GDP annually from the customs union arrangement with the EU, depending on what complementary policies it adopts. They also estimate that lost tariff revenues will amount to 1.4 percent of GDP. For Turkey to avoid worsening its fiscal deficit, it must find ways to reduce expenditures or increase revenues. Its best choice is to reduce expenditures through accelerating privatization of state-owned enterprises which will generate a number of macroeconomic and efficiency benefits in addition to the fiscal benefits.

If a value-added tax (VAT) is used as a replacement tax, they estimate that VAT rates must increase 16.2 percent in each sector - for example, from 10 percent to 11.6 percent - to compensate for the revenue losses from implementing the full customs union. But uniform application of the VAT would allow the VAT rates to fall while still compensating for the loss from reduced tariffs and would increase the welfare gain from the customs union.

This paper - a product of the International Trade Division, International Economics Department - is part of a larger effort in the department to analyze the impact of regional trading arrangements. The study was funded, in part, by the Bank's Research Support Budget under the research project The Impact of EC92 and Trade Integration on Selected Mediterranean Countries (RPO 675-64).

Abstract:
This paper summarizes the principal reform commitments that Russia has undertaken as part of itsWorld Trade Organization (WTO) accession negotiations, providing detailed assessments in banking, insurance, and agriculture. The paper assesses the gains to the Russian economy from these commitments, based on a summary of several modeling efforts undertaken by the author and his colleagues. The author compares Russian commitments with those of other countries that have recently acceded to the WTO to assess the claim that the demands on Russia are excessive due to political considerations. He explains why Russian WTO accession will result in the elimination of the Jackson-Vanik Amendment against Russia. Finally, he discusses the remaining issues in the negotiations and the time frame for Russian accession as of the fall of 2007.

World Trade Organization, Debt Markets, Emerging Markets, Economic Theory & Research, Free Trade

Abstract:
Jensen, Rutherford, and Tarr use a computable general equilibrium model of the Russian economy to assess the impact of accession to the World Trade Organization (WTO), which encompasses improved market access, tariff reduction, and reduction of barriers against multinational service providers. They assume that foreign direct investment in business services is necessary for multinationals to compete well with Russian business service providers, but cross-border service provision is also present. The model incorporates productivity effects in both goods and services markets endogenously through a Dixit-Stiglitz framework. As a result, the estimated gains from WTO accession are much larger than would be obtained from a typical model with perfect competition. The ad valorem equivalent of barriers to foreign direct investment have been estimated based on detailed questionnaires completed by specialized research institutes in Russia. The authors estimate that Russia will gain about 7.2 percent of the value of Russian consumption in the medium run from WTO accession and up to 24 percent in the long run. They estimate that the largest gains to Russia will derive from liberalization of barriers against multinational service providers. Piecemeal and systematic sensitivity analysis shows that their results are robust.

This paper - a product of the Trade Team, Development Research Group - is part of a larger effort in the group to assess the impact of liberalization of barriers against foreign direct investment in services sectors.

Abstract:
Reflecting the large initial distortions, trade, exchange rate, and energy reforms could generate large welfare gains for the Islamic Republic of Iran. If combined with direct income payments to all households (not just the poor), the poor would benefit enormously. The authors show that well intentioned policies of commodity subsidies for the poor can have perverse effects.

The Islamic Republic of Iran has committed itself to substantial trade and market reform in its Third Five-Year Development Plan. It started out with nontariff barriers on all products, a dual exchange rate regime with the market rate more than four times the official rate, and domestic energy subsidies equal to about 90 percent of the cost of energy products. Many of these policies were justified as helping the poor. To analyze the effect of the reforms, separately and together, Jensen and Tarr develop a multisector computable general equilibrium model with 10 rural and 10 urban households. They find that the combined reforms could generate welfare gains equal to about 50 percent of aggregate consumer income. These gains reflect the large initial distortions - for example, energy subsidies equal to about 18 percent of GDP, and retail energy prices equal to about 10 percent of world market prices. Separately, trade reform would lead to gains of about 5 percent of income, exchange rate reform to gains of 7 percent of income, and energy pricing reform to gains of 33 percent of income.

The authors' results show that well-intentioned commodity subsidy policies for the poor can have perverse effects. Direct income payments to all households (not just the poor) would vastly increase the incomes of the poor compared with the status quo. Moreover, if the combined reforms were implemented, the poorest rural household would receive gains equal to about 290 percent of its income, and the poorest urban household gains equal to about 140 percent of its income.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to assess the impact of trade policy reform on the poor.

Abstract:
Lessons from world experience about the consequences of exchange rate overvaluation (the frequent cause of trade crises), the consequences of trying to defend an overvalued exchange rate, and the most appropriate policies for resolving an overvaluation. Despite a trend toward more flexible exchange rates, more than half the world's countries maintain fixed or managed exchange rates. In the 1980s and 1990s, developing countries as a group progressively liberalized their trade regimes, but some governments defend their exchange rate in actions that run counter to long-run plans for liberalization.

Without discussing the relative merits of fixed and flexible exchange rate systems, Shatz and Tarr note that exchange rate management in many countries has resulted in overvaluation of the real exchange rate. Roughly 25 percent of the countries for which data are available have overvalued exchange rates, with black market premiums from 10 percent to more than 100 percent.

After surveying the literature, the authors present lessons from experience about what has worked (or not) in response to crises involving external shocks and external trade deficits - and why. Trying to defend an overvalued exchange rate with protectionist trade policies is a classic pattern, but experience shows such protection to significantly retard the country's growth and delay its integration into the world trading community. In fact, an overvalued exchange rate is often the root cause of protection, preventing the country from returning to more liberal trade policies that allow growth and integration into the world community without exchange rate adjustment.

Most developing countries have downward price and wage rigidities and, with an external trade deficit, require some form of nominal exchange rate adjustment to restore external equilibrium. Shatz and Tarr present cross-country econometric and case study evidence - citing examples from Argentina, Chile, Ghana, the Republic of Korea, Malaysia, Turkey, Uruguay, and Sub-Saharan Africa (including the CFA zone) - that overvalued exchange rates reduce economic growth.

Defending the exchange rate, they show, has no medium-term benefits, since falling reserves will eventually force devaluation. Better to have devaluation occur without further debilitating losses in reserves and lost productivity because of import controls. After devaluation the exchange rate will reach a new equilibrium, strongly influenced by government and central bank policies.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to assess the consequences of trade liberalization in developing countries.

Abstract:
There is a growing consensus that the U.S. government programs of bailing out the large financial institutions is deeply flawed, and that there are much better ones available. The programs of the U.S. for the purchase of toxic assets potentially transfer trillions of dollars from the US taxpayer to the financial institutions and risk the credit of the U.S. government. Estimates suggest that the troubled asset purchases are inadequate to put the financial institutions on a sound footing. So zombie banks persist, and their avoidance of normal business lending constitutes a roadblock to economic recovery. The right approach is to take the banks that require substantial subsidies into FDIC receivership, wiping out shareholders and giving the bondholders a haircut. Chapter 11 bankruptcy proceedings are another viable option in many cases. The restructured institutions will be re-privatized as financially viable institutions. The smooth resolution of the Lehman Brothers bankruptcy, that financial market regulators assessed occurred with "no major operational disruptions or liquidity problems," shows that the allegation of systemic financial market failure from bankruptcy of a large central player in the counterparty transactions is grossly exaggerated. Crucially, bailing out these institutions provides perverse incentives to financial firms that they can take risks at taxpayer expense, sowing the seeds for the next crisis.

financial crisis, bailouts. credit default swaps, bondholder haircuts, deficits, zombie banks, toxic assets, receivership

Abstract:
Rutherford, Tarr, and Shepotylo use a computable general equilibrium comparative static model of the Russian economy to assess the impact of accession to the World Trade Organization (WTO) on income distribution and the poor. Their model is innovative in that they incorporate all 55,000 households from the Russian Household Budget Survey as "real" households in the model. This is accomplished because they develop a new algorithm for solving general equilibrium models with a large number of agents. In addition, they include foreign direct investment and Dixit-Stiglitz endogenous productivity effects in their trade and poverty analysis. In the medium term, the authors find that virtually all households gain from Russian WTO accession, with 99.9 percent of the estimated gains falling within a range between 2 and 25 percent increases in household income. They show that their estimates are decisively affected by liberalization of barriers against foreign direct investment in business services sectors and endogenous productivity effects in business services and goods. The authors use their integrated model to assess the error associated with a "top down" approach to micro-simulation. They find that approximation errors introduced by failing to account for income effects in the conventional sequential approach are very small. However, data reconciliation between the national accounts and the household budget survey is important to the results. Despite the estimated gains for virtually all households in the medium term, many households may lose in the short term because of the costs of transition. So, safety nets are crucial for the poorest members of society during the transition.

This paper - a product of the Trade Team, Development Research Group - is part of a larger effort in the group to assess the impact of trade on poverty.

International, Economics, Poverty

Abstract:
In this paper the authors use a computable general equilibrium model of the Kazakhstan economy to assess the impact of accession to the World Trade Organization (WTO), which encompasses (1) improved market access; (2) Kazakhstan tariff reduction; (3) reduction of barriers against entry by multinational service providers; and (4) reform of local content and value-added tax policies confronting multinational firms in the oil sector. They assume that foreign direct investment in business services is necessary for multinationals to compete well with Kazakstan business services providers, but cross-border service provision is also present. The model incorporates productivity effects in both goods and services markets endogenously, through a Dixit-Stiglitz framework. The authors estimated the ad valorem equivalent of barriers to foreign direct investment based on detailed questionnaires completed by specialized research institutes in Kazakhstan. They estimate that Kazakhstan will gain about 6.7 percent of the value of Kazakhstan consumption in the medium run from WTO accession and up to 17.5 percent in the long run. They estimate that the largest gains to Kazakhstan will derive from liberalization of barriers against multinational service providers, but the other three elements of WTO accession that the authors model all contribute positively to the estimated gains. Piecemeal sensitivity analysis shows that qualitatively the results are robust, but there are four parameters in the model that significantly affect the estimated magnitude of the gains from WTO accession.

Economic Theory & Research, Transport Economics Policy & Planning, FreeTrade, ICT Policy and Strategies, Investment and Investment Climate

Abstract:
In World Trade Organization (WTO) accession negotiations, telecommunications is always a sector that receives close scrutiny by the WTO Working Party, and the extent of market access and nondiscriminatory treatment of multinational telecommunications companies in Russia has been a significant issue in Russia's accession negotiations. Jensen, Rutherford, and Tarr use a computable general equilibrium model of the Russian economy to assess the role of telecommunications in the discussions regarding Russian accession to the WTO. The results show that reduction of barriers to foreign direct investment in telecommunications will bring substantial gains to the Russian economy, including an increase in the productivity of Russian labor and capital. Despite the fact that multinationals use Russian labor less intensively than Russian firms, demand for Russian labor employed in telecommunications should increase, following reductions in barriers to foreign direct investment that are included in the context of WTO accession. This is because the overall demand for telecommunication services should increase due to the growth effects of the liberalization of barriers against foreign direct investment generally and the reduction in tariffs. Russian capital owners in telecommunications will likely be sought as joint venture partners and can restructure and obtain gains as partners with foreign firms. Wholly owned Russian firms are likely to experience losses.

This paper - a product of the Trade Team, Development Research Group - is part of a larger effort in the group to assess the consequences of liberalization of barriers against foreign direct investment in services.

Abstract:
Harrison, Rutherford, Tarr, and Gurgel estimate that the Free Trade Agreement of the Americas (FTAA), the EU-MERCOSUR agreement, and multilateral trade policy changes will all be beneficial for Brazil. The Brazilian government strategy of simultaneously negotiating the FTAA and the EU-MERCOSUR agreement, while supporting multilateral liberalization through the Doha Agenda, will increase the benefits of each of these policies.

The authors estimate that the poorest households typically gain roughly three to four times the average for Brazil from any of the policies considerethe United States protects its most highly protected markets. Both the FTAA and the EU-MERCOSUR agreements are net trade-creating for the countries involved, but excluded countries almost always lose from the agreements. The authors estimate that multilateral trade liberalization of 50 percent in tariffs and export subsidies results in gains to the world more than four times greater than either the FTAA or the EU-MERCOSUR agreement. This shows the continued importance to the world trading community of the multilateral negotiations.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to assess the impact of trade liberalization on poverty.

Abstract:
This paper is the introduction and summary chapter of the 43 chapter volume entitled Handbook of Trade Policy and WTO Accession for Development in Russia and the CIS. The key policy conclusions of each of the chapters are highlighted in this paper. The Handbook will be published only in Russian in 2005, but an English language version of the majority of the papers described here is available on the website. This paper first explains the potential importance of World Trade Organization (WTO) accession as a development tool, and discusses the recent successful development models and the role of trade policy in their development. The paper then summarizes the three parts of the Handbook. The first part treats trade policy (with applications to Russia and the Commonwealth of Independent States [CIS]). The second part treats World Trade Organization institutions and disciplines, again with Russia and CIS applications. And the third part focuses on various aspects of the impact of WTO accession on Russia. The numerous papers that relate trade policy and WTO accession to experience in Russia and the CIS are likely to be of special interest to native English speakers, since these papers are new to the literature. The papers in the Handbook are intended to be non-technical materials accessible to a wide policy audience. The Handbook forms the basis of a World Bank Institute course on trade policy and WTO accession, which has been delivered and will be delivered again on multiple occasions.

Abstract:
July 2001

Among Chile's bilateral regional agreements, only Chile's agreements with "Northern" partners provide enough market access to offset the costs to Chile of trade diversion. Because of preferential market access, however, "additive regionalism" is likely to provide Chile with far more gains than the static welfare gains from unilateral free trade. At least one partner country loses from each of the regional trade agreements considered in this study, and excluded countries always lose. The Free Trade Agreement of the Americas (FTAA) produces gains for almost all the member countries, but the European Union is a big loser. Countries of the Americas gain more in aggregate from global free trade than from the FTAA.

Using a multisector, multicountry, computable general equilibrium model, Harrison, Rutherford, and Tarr examine Chile's strategy of negotiating bilateral free trade agreements with all of its significant trading partners (referring to this policy as additive regionalism). They also evaluate the Free Trade Agreement of the Americas (FTAA) and global free trade.

Among Chile's bilateral regional agreements, only Chile's agreements with "Northern" partners provide enough market access to offset the costs to Chile of trade diversion. Because of preferential market access, however, additive regionalism is likely to provide Chile with many times as many gains as the static welfare gains from unilateral free trade.

Harrison, Rutherford, and Tarr find that at least one partner country loses from each of the regional trade agreements they consider, and excluded countries as a group always lose.

They estimate that the FTAA produces large welfare gains for the members, with the European Union being the big loser.

Gains to the world from global free trade are estimated to be at least 36 times greater than gains from the FTAA. Even countries of the Americas in aggregate gain more from global free trade than from the FTAA.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to examine the impact of regional trade arrangements on development and poverty reduction. David Tarr may be contacted at dtarr@worldbank.org.

Abstract:
The Customs Union proposed for four members of the Commonwealth of Independent States (CIS)- the Free Trade Area established among the 12 members of the CIS- likely to lock those countries into the old technology of the former Soviet Union. The effects of such organizations will be especially negative for the countries that have already established relatively liberal trade regimes.

In the aftermath of the breakup of the Soviet Union, trade among the new independent states collapsed. To help reestablish interstate trade, the 12 members of the Commonwealth of Independent States (CIS) established a Free Trade Area. More recently, four members of the CIS- Kazakstan, the Kyrgyz Republic, and Russia- in principle to establish a Customs Union.

Michalopoulos and Tarr analyze the economic implications for potential members of establishing such a Customs Union. They conclude that the dynamic effects of the Union (and the Free Trade Area) are likely to be negative, because they would tend to lock the countries into the old technology of the former Soviet Union. The static effects would tend to be mixed but would be more harmful to countries that have already established relatively liberal trade regimes with lower average and less-differentiated tariffs than the common external tariff contemplated by the proposed Customs Union.

This paper-a joint product of the International Trade Division, International Economics Department, and the Russia and Central Asia Department-is part of a larger effort in the Bank to analyze the effects of different trade regimes in countries in transition.

Abstract:
A survey of more than 50 empirical papers shows that the adjustment costs of trade liberalization are small relative to the benefits. Moreover, manufacturing employment typically increases with trade liberalization. The limited data suggest that trade liberalization reduces poverty.

Virtually all of the studies that quantify the adjustment costs of trade liberalization relative to the benefits point to the conclusion that adjustment costs are small in relation to the benefits of trade liberalization.

The explanation for low adjustment costs is that:

These costs are typically short term and end when workers find a job, but the benefits grow as the economy does.

Unemployment doesn't last long, especially where workers' pay was not substantial in the original job.

Normal labor turnover often exceeds job displacement from trade liberalization.

Moreover, studies that examine the impact of trade liberalization on employment in developing countries find there is little decline - and usually an increase - in manufacturing employment in developing countries a year after trade liberalization, for three reasons:

Developing countries tend to have comparative advantage in labor-intensive industries, and trade liberalization tends to favor labor.

Interindustry shifts occur after trade liberalization, which minimizes the dislocation of factors of production.

In many industries normal labor turnover exceeds dislocation from trade liberalization, so downsizing, when necessary, can be accomplished without much forced unemployment.

Matusz and Tarr recommend a uniform tariff to minimize special-interest lobbying for protection since it diffuses the benefits of protection.

This paper - a product of Trade, Development Research Group - is part of larger effort in the group to examine how trade liberalization affects growth and poverty reduction. David Tarr may be contacted at dtarr @worldbank.org.

Abstract:
The Russian tariff structure contains over 11,000 tariff lines of which about 1,700 use the so-called combined tariff rate system. For the combined system tariff lines, the actual tariff applied by Russian customs is the maximum of the ad valorem or specific tariff. The lack of available data and the difficulty in calculating the ad valorem equivalence of the specific tariffs have resulted in some previous efforts that have simply ignored the specific tariffs. This is the first paper to accurately assess the tariff rates. The authors show that ignoring the specific tariffs results in an underestimate of the actual tariff rates by about 1 to 3 percentage points, depending on the year. The average tariff in Russia has increased between 2001 and 2003 from about 11.5 to between 13 and 14.5 percent, but it has held steady in 2004 and 2005. This places Russia's tariffs at a level slightly higher than other middle-income countries and considerably higher than the OECD countries. The trade weighted standard deviation of the tariff approximately doubled from 9.5 percent in 2001 to 18 percent in 2003, but then fell to 15.2 percent by 2005. The food sector and light industry are the aggregate sectors with the highest tariff rates - their tariff rates in 2005 were 23.1 percent and 19.5 percent on a trade-weighted basis, but the increase in their tariffs has not led to an increase in their output.

International Trade and Trade Rules, Free Trade, Export Competitiveness, Trade Policy, Contract Law

Abstract:
Using a multi-region CGE model, we evaluate the regional, multilateral and unilateral trade policy options of MERCOSUR from the perspective of the welfare of all potential partners. In Brazil, we focus on poverty impacts. We find that the poorest households in Brazil experience percentage gains of between 1.5 to 5.5 percent of their consumption, which is about three to four times the average for Brazil. Protection in Brazil favors capital intensive manufacturing relative to unskilled labor intensive agriculture and manufacturing. So trade liberalization raises the return to unskilled labor relative to capital, thereby helping the poor.

Poverty, development, trade policy, free trade agreement of the Americas

Abstract:
Welfare in Chile would be improved by moving toward uniformity in the value-added tax and lowering the Chilean tariff to between 6 and 8 percent. Chile is currently evaluating a wide range of possible trade policies. Using a global computable general equilibrium model, Harrison, Rutherford, and Tarr examine a range of trade policy and complementary tax policy options for Chile.

They focus on Chile's principal preferential trade policy options: a free-trade area with MERCOSUR, a customs union with MERCOSUR, and a free trade area with NAFTA. They also examine such options as complementary tariff reduction with nonpartner countries in combination with implementing the free trade area options; unilateral or global trade liberalization; and the optimum unilateral tariff.

Their principal policy conclusions:

Lowering Chile's tariffs preferentially or multilaterally leads to only small gains as Chile starts with a rather efficient external trade regime, uniform tariffs of 11 percent.

Largely because of its efficient uniform tariff, preferential tariff reduction will reduce Chilean welfare through trade diversion, unless Chile can improve its access in the markets of partner countries.

NAFTA offers enough access to benefit Chile; MERCOSUR does not, once the trade diversion costs of MERCOSUR are taken into account.

Under their preferred-elasticity scenario, Chile can convert the MERCOSUR agreement from a loss to a gain if it lowers its external tariff to between 6 and 8 percent. Doing so will also increase the gains from a potential agreement with NAFTA.

Chile's current value-added tax imposes distortionary costs because collection rates are not uniform. Chile will gain if it can collect the VAT more uniformly.

Tariff reductions from trade reform will require an increase in domestic taxes, so greater uniformity in domestic taxes (less distortion in replacement taxes) will maximize the benefits from trade reform. Welfare will be improved by moving toward uniformity in the VAT and lowering the Chilean tariff to between 6 and 8 percent.

This model ignores dynamic gains from trade liberalization, the result of importing either a greater variety of products or more technologically advanced products.

This paper - a product of the International Trade Division, International Economics Department - is part of a larger effort in the department to examine the impact of regional trade integration in developing countries.

Abstract:
Most interesting results on the welfare effects of regional arrangements are ambiguous at a theoretical level. Many questions only have quantitative answers that are specific to the particular structural features of the economy and the policy considered. So, to determine the impact of prospective regional arrangements governments often rely on a quantitative evaluation. Usually at the request of client governments of the World Bank, the authors have implemented many computable general equilibrium (CGE) models to inform policymakers.

The authors summarize the main conclusions drawn from these studies. The principal conclusions are:

• Countries excluded from a preferential trade arrangement almost always lose.

• Market access is a key determinant of the net benefits of a preferential trade arrangement.

• With a free trade agreement (FTA) the external tariff can be lowered such that a poor FTA becomes attractive.

• For Southern countries, North-South agreements offer a beneficial increase in competition in their home markets, and involve little increase in the supply price of Northern country sales in Southern countries.

• Multilateral trade liberalization results in significantly larger gains to the world than the network of regional arrangements.

• For individual countries without high protection, "additive regionalism" will likely result in substantially larger gains than unilateral trade liberalization.

• Tax replacement requirements reduce the set of desirable regional arrangements.

• Trade taxes are often an inefficient source of tax revenue.

• Trade liberalization should be expected to be pro-poor in developing countries, but results will be diverse at the household level so safety nets are important.

• Dynamic effects to reverse conclusions regarding regionalism are not expected.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to assess the impact of regional trade integration on growth and poverty.

Abstract:
In this paper we develop a computable general equilibrium model of the regions of Russia to assess the impact of accession to the World Trade Organization (WTO) on the regions of Russia. We estimate that the average gain in welfare as a percentage of consumption for the whole country is 7.8 percent (or 4.3 percent of consumption); we estimate that three regions will gain considerably more: Northwest (11.2 percent), St. Petersburg (10.6 percent) and Far East (9.7 percent). We estimate that the Urals will gain only 6.2 percent of consumption, considerably less than the national average. The principal explanation in our central analysis for the differences across regions is the ability of the different regions to benefit from a reduction in barriers against foreign direct investment. The three regions with the largest welfare gains are clearly the regions with the estimated largest shares of multinational investment. But the Urals has attracted relatively little FDI in the service sectors. An additional reason for differences across regions is quantified in our sensitivity analysis: regions may gain more from WTO accession if they can succeed in creating a good investment climate.

Economic Theory & Research, ICT Policy and Strategies, Free Trade, Markets and Market Access, Investment and Investment Climate

Abstract:
This paper employs a 55 sector small open economy computable general equilibrium model of the Kenyan economy to assess the impact of the liberalization of regulatory barriers against foreign and domestic business service providers in Kenya. The model incorporates productivity effects in both goods and services markets endogenously, through a Dixit-Stiglitz framework. It estimates the ad valorem equivalent of barriers to foreign direct investment based on detailed questionnaires completed by specialists in Kenya. The authors estimate that Kenya will gain about 11 percent of the value of Kenyan consumption in the medium run (or about 10 percent of gross domestic product) from a full reform package that also includes uniform tariffs. The estimated gains increase to 77 percent of consumption in the long-run steady-state model, where the impact on the accumulation of capital from an improvement in the productivity of capital is taken into account. Decomposition exercises reveal that the largest gains to Kenya will derive from liberalization of costly regulatory barriers that are non-discriminatory in their impacts between Kenyan and multinational service providers.

Transport Economics Policy &Planning, Economic Theory &Research, Banks &Banking Reform, Emerging Markets, Debt Markets

Abstract:
This paper discusses the political economy behind the principal trade policy decisions in Russia since independence. I discuss why export restraints were widely employed in the early transition years and why the export quotas proved more difficult to remove than anticipated. Why it was so difficult to resolve the monetary basis for the collapse in trade among the newly independent states. Why the search for rents for Russian industry motivated the creation of a customs union among selected countries in the Commonwealth of Independent States, but also proved its undoing. How Russian leaders initially were exceptionally insightful in seeing WTO accession as a golden opportunity for domestic reform, but why in recent years they have turned to industrial policy for diversification. I discuss the possibly unique political economy of Russia in which political contributions are extracted without political influence.

political economy, trade policy, Russia, diversification, transition, customs union, WTO accession

Abstract:
Despite a trend toward more flexible rates, more than half the world`s countries maintain fixed or managed exchange rates. In the 1980s and 1990s, developing countries as a group progressively liberalized their trade regimes, but some governments defend their exchange rate in actions that run counter to long-run plans for liberalization. Without discussing the relative merits of fixed and flexible exchange rate systems, the authors note that exchange rate management in many countries has resulted in overvaluation of the real exchange rate. Roughly twenty five percent of the countries for which data are available have overvalued exchange rates, with black market premiums from 10 percent to more than 100 percent. After surveying the literature, the authors present lessons from experience about what has worked (or not) in response to crises involving external shocks and external trade deficits - and why. Trying to defend an overvalued exchange rate with protectionist trade policies is a classic pattern, but experience shows such protection does significantly retard the country`s growth, and delay its integration into the world trading community. In fact, and overvalued exchange rate is often the root cause of protection, preventing the country from returning to more liberal trade policies that allow growth and integration into the world community without exchange rate adjustment. Most developing countries have downward price and wage rigidities and, with an external trade deficit, require some form of nominal exchange rate adjustment to restore external equilibrium. The authors present cross-country econometric and case study evidence - citing examples from Argentina, Chile, Ghana, The Republic of Korea, Malaysia, Turkey, Uruguay, and Sub-Saharan Africa (including the CFA zone) - that overvalued exchange rates reduce economic growth. Defending the exchange rate, they show, has nor no medium-term benefits, since falling reserves will eventually force devaluation. Better to have devaluation occur without further debilitating losses in reserves and lost productivity because of import controls. After devaluation the exchange rate will reach a new equilibrium, strongly influenced by government and central bank policies.

Economic Stabilization, Macroeconomic Management, Pro-Poor Growth and Inequality, Trade Law, Economic Theory&Research

Abstract:
Cameroon stands to gain economically from the new regional trade agreement among countries of the Central African Economic and Monetary Community. Better access to partner markets and reduction of the external tariff explain virtually all of Cameroon's welfare gain.

Bakoup and Tarr quantify the impact on Cameroon of three aspects of its new regional trade agreement with the Central African Economic and Monetary Community (the CEMAC agreement):

- Improved access to markets in CEMAC.
- Preferential tariff reduction.
- Reduction of its external tariff through implementation of the common external tariff of CEMAC.

They estimate that Cameroon will gain from the agreement but show how Cameroon's regional market power greatly affects the magnitude of its gains. They assume that Cameroon has regional market power in both imports and exports despite being small in world markets.

They find that better access to partner markets and reduction of the external tariff explain virtually all of Cameroon's welfare gain.

In their preferred scenario (Cameroon having regional market power), reduction of the external tariff explains three-quarters of the welfare gain.

If Cameroon further reduces tariffs to its regional partners, the effect on its economy is a loss of real income but the impact is negligible.

Should Cameroom's partners fail to provide tariff-free access to their markets, Bakoup and Tarr estimate that, given Cameroon`s regional market power, Cameroon would gain even more from free trade than it would from implementing the CEMAC arrangements.

This paper - a product of the Development Research Group - is part of a larger effort in the group to investigate the implications of regional trade arrangements.

Abstract:
Producer services such as managerial and engineering consulting can provide domestic firms with the substantial benefits of specialized knowledge that would be costly in terms of both time and money for domestic firms to develop on their own. These intermediate services are often non-traded, or costly to trade, and are best transferred through foreign direct investment. This has important implications for public policy since policies that impact on foreign direct investment are often quite different from those that impact on trade in goods. We develop a model of these services in this paper. Results show that: (1) while imported services are partial-equilibrium substitutes for domestic skilled labor, they may be general-equilibrium complements, (2) imported services lead to differential productivity effects in final goods production so that, for example, the pattern of trade in goods can reverse when FDI is permitted, and (3) the optimal tax on FDI (which we do not advocate as a practical matter) is negative.

Abstract:
Foreign producer services can provide substantial benefits for domestic firms. We build on earlier monopolistic-competition models of intermediate producer services in this paper. Results show that: (1) while foreign services are partial-equilibrium substitutes for domestic skilled labour, they may be general-equilibrium complements, (2) service trade can provide crucial missing inputs that reverse comparative advantage in final goods, (3) the 'optimal' tax on imported services may be a subsidy, and (4) in our dynamic formulation, there may be earnings losses for immobile workers along a transition path that suggest potentially important equity consequences of reform.

Abstract:
In this paper a computable general equilibrium model of the Russian economy is used to assess the impact of accession to the World Trade Organization (WTO), which encompasses improved market access, Russian tariff reduction, and reduction of barriers against multinational service providers. It is assumed that foreign direct investment in business services is necessary for multinationals to compete well with Russian business services providers, but cross-border service provision is also present. The model incorporates productivity effects in both goods and services markets endogenously, through a Dixit-Stiglitz framework. It is estimated that Russia will gain about 7.2% of the value of Russian consumption in the medium term from WTO accession and up to 24% in the long run. It is also estimated that the largest gains to Russia will derive from liberalization of barriers against multinational service providers. Piecemeal and systematic sensitivity analysis shows that the results are robust.

Abstract:
Our analysis reveals that, from Russia's perspective, there is no economic rationale to unify the price of natural gas it sells domestically and in Europe. We argue that pipelines allow Gazprom to segment the Russian market from the European (including Turkey) market and that Russia has market power in the European market. If Russia were to fail to exploit this market power in its European market, by selling its natural gas to Europe at only full long-run marginal cost plus transportation costs, Russia would lose between $5 billion and $7.5 billion per year (almost two per cent of its GDP). If, instead, Russia were to raise its domestic prices to the prices it charges in Europe, Russian industry would incur very large investment adjustment and unemployment costs in the short run - adjustment costs that cannot be justified on the basis of comparative advantage. We estimate that the efficient world price would be achieved if Gazprom were to employ its optimal 'two-part tariff'. The optimal two-part tariff would double Gazprom's annual profits in Europe, but it involves significant long-term risks for Gazprom of lost market share.

Abstract:
This paper develops a seven-region comparative static computable general equilibrium model of Russia to assess the impact of accession to the World Trade Organization on these seven regions (the federal okrugs) of Russia. In order to assess poverty and distributional impacts, the model includes ten households in each of the seven federal okrugs, where household data are taken from the Household Budget Survey of Rosstat. The model allows for foreign direct investment in business services and endogenous productivity effects from additional varieties of business services and goods, which the analysis shows are crucial to the results. National welfare gains are about 4.5 percent of gross domestic product in the model, but in a constant returns to scale model they are only 0.1 percent. All deciles of the population in all seven federal okrugs can be expected to significantly gain from Russian World Trade Organization accession, but due to the capacity of their regions to attract foreign direct investment, households in the Northwest region gain the most, followed by households in the Far East and Volga regions. Households in Siberia and the Urals gain the least. Distribution impacts within regions are rather flat for the first nine deciles; but the richest decile of the population in the three regions that attract a lot of foreign investment gains significantly more than the other nine representative households in those regions.

Economic Theory & Research, Emerging Markets, Access to Finance, Debt Markets, Investment and Investment Climate

Abstract:
This paper employs a 52-sector, small, open-economy computable general equilibrium model of the Tanzanian economy to assess the impact of the liberalization of regulatory barriers against foreign and domestic business service providers in Tanzania. The model incorporates productivity effects in both goods and services markets endogenously, through a Dixit-Stiglitz framework. It summarizes policy notes on the key business service sectors that were prepared for this work, and estimates the ad valorem equivalent of barriers to foreign direct investment based on these policy notes and detailed questionnaires completed by specialists in Tanzania. The authors estimate that Tanzania will gain about 5.3 percent of the value of Tanzanian consumption in the medium run (or about 4.8 percent of gross domestic product) from a full reform package that also includes uniform tariffs. The estimated gains increase to about 16 percent of consumption in the long-run, steady-state model, where the impact on the accumulation of capital from an improvement in the productivity of capital is taken into account. Decomposition exercises reveal that the largest gains to Tanzania will derive from liberalization of costly regulatory barriers that are non-discriminatory in their impacts between Tanzanian and multinational service providers.

Transport Economics Policy & Planning, Banks & Banking Reform, Economic Theory & Research, E-Business, Debt Markets

Abstract:
This paper determines the impacts of the Free Trade Agreement of the Americas (FTAA) for Brazil under alternative assumptions concerning the returns to scale and the nature of competition in several industries, emphasizing the effects on the agribusiness activities. The GTAPinGAMS applied general equilibrium model is used to run the simulations. The results suggest different changes in output, imports, exports, and prices under alternative assumptions about market structure. The FTAA allows the exploitation of economies of scale and reduction of markups in almost all industries, with evidences of rationalizing and pro-competitive effects occurring in the industries under imperfect competition. The welfare gains from the FTAA are larger in the model with market imperfections. If the FTAA excludes products from the agribusiness sectors, the Brazilian agricultural industries will exploit less the economies of scale.

Economic Integration, Trade Policy, Poverty, General Equilibrium