Preferential Liberalization and its Economy-Wide Effects in Honduras

58 Pages Posted: 20 Apr 2016

See all articles by Denis Medvedev

Denis Medvedev

World Bank; American University

Date Written: February 1, 2008


This paper quantifies the likely benefits of trade and investment liberalization in a small, poor, open economy, using the accession of Honduras to the Dominican Republic-Central American Free Trade Agreement as a case study. The results show that bilateral trade liberalization with the United States is likely to have almost no effect on welfare in Honduras, while the reciprocal removal of protection vis-a-vis the rest of Central America would lead to significantly larger gains. Potential gains from increased net foreign direct investment inflows overwhelm those expected from trade reform alone, particularly if the new foreign direct investment generates productivity spillovers. However, if it is to replace Honduran investment rather than complement domestic capital formation, growth performance is unlikely to improve and may even suffer. The paper's results identify several areas for policy attention by Honduran policy makers to make the Dominican Republic-Central American Free Trade Agreement more development-friendly. These include carefully considering the budgetary implications of trade reform, widening social safety nets to counter the trends toward increasing income inequality, and sequencing the reforms to ensure a close alignment of Honduras'comparative advantage on the regional and global markets.

Keywords: Economic Theory &Research, Currencies and Exchange Rates, Free Trade, Emerging Markets, Debt Markets

Suggested Citation

Medvedev, Denis, Preferential Liberalization and its Economy-Wide Effects in Honduras (February 1, 2008). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2008. Available at SSRN:

Denis Medvedev (Contact Author)

World Bank ( email )

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American University

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