Bank Branch Expansion and Poverty Reduction--A Critique: I point out several flaws in the recent
study by Robin Burgess and Rohini Pande (AER
2005) linking the bank branch expansion to poverty reduction in India during
1977-90. The authors miss some critical details of the policy and, more
importantly, fail to recognize that it was the credit policy and anti-poverty
programs that drove the branch expansion rather than the adoption of a specific branch
expansion rule. These facts greatly undermines the identification strategy
of the authors while giving rise to the omitted variables problem.
Migration: Who Gains, Who Loses: (revised version forthcoming in
the Brookings Trade Policy Forum 2006): The paper considers separately the welfare of
the source and destination countries as also the migrant. It also makes a distinction
between temporary and permanent migration on the one hand and skilled and
unskilled migration on the other. It argues that skilled emigration is
likely to be potentially damaging to the small developing countries such as
Jamaica that stand to lose a significant proportion of their skilled labor force
to it but will on balance be beneficial to the large developing countries such
as India and China. The paper also questions the wisdom of the recent
suggestions of a development strategy that relies primarily on temporary
Inequality and Endogenous Trade Policy Outcomes: (with
Nuno Limao--revised version forthcoming in the JIE) An
enduring puzzle in international economics is why trade interventions are
biased in favor of import-competing rather than exportable sectors and
therefore restrict trade. In
this paper, we show that if the government's objective reflects a concern
for inequality then trade policy generally exhibits an anti-trade bias.
Importantly, under neutral assumptions, the mechanism that we analyze
generates the anti-trade bias independently of whether factors are specific
or mobile across sectors. The mechanism also generates an anti-trade bias
between large countries even after they sign reciprocal trade agreements
that eliminate any terms-of-trade motivation for the use of trade protection.
Preferential Trading and Welfare: The Small-union Case Revisited:
The welfare analyses of preferential trading arrangements have been
characterized by generally inconclusive and messy results.
In this paper, I attempt to give order to the analysis of one
important case: a union between two small countries.
The analysis has two key advantages over the existing literature.
First, the model employed is fully general in that it allows for
goods that are exported and imported by both partners as well as those
that are exported by one and imported by the other partner.
Second, the results are derived for finite changes in tariff
rates rather than being limited to infinitesimally small changes.
main results of the paper can be summarized as follows.
First, assuming all goods to be normal in consumption, if two
small countries form a free trade area or exchange some tariff
preferences, their joint welfare falls or rises as their joint output,
valued at world prices, rises or falls.
Second, if, in addition, the numeraire good uses only labor and
all other goods use labor and a sector-specific factor, the exchange of
preferences or free trade area necessarily lowers the union’s joint
welfare. Third, a union
member is necessarily hurt by its own preferential liberalization.
The higher are its external tariffs and the larger its imports
from the partner, the more it loses from extending the preferences.
Fourth, in the specific-factors case just mentioned, a union
member necessarily benefits from the tariff preference it receives from
the partner. The more it
exports to the partner and the higher the latter’s tariffs, the
greater the gain. Finally, in the specific-factors case, an FTA benefits a
member more the larger its bilateral trade surplus with the partner and
the lower its external tariffs relative to the partner.
Free Trade Areas and Rules of Origin: Economics and Politics: (with
Rupa Duttagupta) We
incorporate intermediate inputs into a small-union general-equilibrium
model and develop the welfare economics of preferential trading under
the rules of origin. Combining
this analysis with the Grossman-Helpman political-economy model, we
demonstrate that the rules of origin can improve the political viability
of free trade areas (FTAs). Two interesting outcomes are derived. First, an FTA that lowered joint welfare of the union and was
voted down in the absence of the rules of origin may become feasible in
the presence of these rules. Second,
an FTA that increased joint welfare of the union but was voted down in
the absence of the rules of origin may become acceptable in the presence
of these rules but it may also turn welfare inferior to status quo.
The Cost of Protection: Where do we Stand?: (AER
Papers and Proceedings May 2002): The paper focuses on the static costs of
protection and argues that the estimates based on the traditional
neoclassical model are small because they typically measure the cost of
low levels of protection. The cost of high levels of protection
can be very high. Alternatively, in the presence of scale economies,
endogenous determination of product variety, X-efficiency effects and
Directly Unproductive Profit-seeking activities, even low levels of
protection can lead to high costs. A longer version of the paper
is available below under the title "Alternative Approaches to
Measuring the Cost of Protection."
9. Alternative Approaches to Measuring the Cost of Protection: (Prepared
for presentation at the invited AEA session "Feuds over Free
6, 2002.) I make two
broad points in the paper. First, the view that traditional models
based on increasing opportunity costs imply low costs of protection has
resulted from estimates derived for cases with low levels of
protection. If the level of protection itself is high, traditional models can
readily lead to costs ranging from 5 to 10 percent of
the GDP. The cost of autarky can be even higher. Second, low
protection can also lead to high costs provided we allow for economies
of scale in production, fixed costs of entering a market, directly
unproductive profit-seeking (DUP) activities or X-efficiency. I also provide a summary of the literature on the
relationship between openness on the one hand and growth and
productivity on the other.
On Necessarily Welfare-Enhancing Free Trade
(JIE 57(2), August 2002, 353-367) (With Pravin Krishna)
well-known Kemp-Vanek-Ohyama-Wan proposition establishes that if two or
more countries form a customs union (CU) by freezing their net external
trade vector through a common
external tariff and eliminating internal trade barriers, the union as a
whole and the rest of the world cannot be worse off than before.
Owing to the fact that a Free Trade Area (whose member countries
impose country specific external tariff vectors) does not equalize
marginal rates of substitution across its member countries (in contrast
to a CU), the literature has been unable to provide a parallel
demonstration regarding welfare improving Free Trade Areas (FTAs). The
present paper eliminates this gap. In extending the result to the case
with intermediate inputs, the paper also sheds new light on the rules of
origin required to support such necessarily welfare enhancing FTAs.
We show here that provided no trade deflection is permitted, all
that is required by way of rules of origin is that the goods produced
within the union —whether final or intermediate — be allowed to be
traded freely. The proportion of domestic value added in final goods
does not enter as a criterion in the rules of origin.
Politics of Free
Trade Areas: Tariffs versus Quotas: (JIE
58(2), December 2002, 413-427)
Rupa Duttagupta) In
this paper we compare and contrast the political viability of bilateral
Free Trade Area (FTA) Agreements in the presence of tariffs and quotas.
Assuming that the government maximizes a weighted sum of welfare and
producer profits, we show that whereas an FTA is unambiguously rejected by
one of the countries under a tariff it may be endorsed by both trading
partners under a voluntary export quota or import quota that provides
the same level of protection as the tariff.
Did the Multi-fiber Agreement Make the NAFTA Politically More
Acceptable? A Theoretical Analysis: This is the longer version of #7 and spells out
some of the results in greater detail.
Trade Liberalization: The Traditional Theory
and New Developments
(Published: JEL 38, June 2000, 287-331).
paper begins by systematically developing the “static” theory of
preferential trade areas (PTAs) and showing that neither a large volume
of initial intra-union trade nor geographical proximity can serve as a
guide to welfare enhancing PTAs.
The paper then discusses the modern literature addressing the
welfare effects of a simultaneous division of the world into many PTAs,
the impact of a PTA on external tariffs and the “dynamic” time-path
question of whether PTAs are building blocks or stumbling blocks towards
multilateral freeing of trade.
A final substantive section discusses some key theoretical
considerations in the empirical evaluation of PTAs.
Evaluating the Factor-Content Approach to Measuring the Effect of Trade
on Wage Inequality: (Published: JIE 50, 2000, 91-116)
paper addresses two questions: (i) can factor content of trade be used
to measure the effect of trade on wage inequality in a given year, with tastes and technology constant; and (ii) can it be
used to measure the contribution of trade to the change in wage inequality between
two years, with tastes and technology allowed to change?
Deardorff and Staiger (1988) had shown that the answer to the
first question can be given in the affirmative provided all production
functions and the utility function are Cobb-Douglas.
I demonstrate, as does Deardorff (2000) independently, that the
affirmative answer can be extended to the case when all production
functions and the utility function take the CES form with identical
elasticity of substitution.
I further demonstrate that we can answer the second question in
the affirmative under the same conditions as the first.
I then examine critically the assumptions underlying these
They include identical elasticities of substitution across all
production functions and the utility function, absence of increasing
returns and non-competing imports, homotheticity of demand, and no
endogenous response of factor supplies to trade. I conclude that, taken
as a whole, these assumptions are sufficiently strong to leave many
analysts, including myself, skeptical of the estimates based the
and Ramaswami: Why
it is a Classic?:
(Unpublished) A recurring theme in trade theory until as
late as 1950s is that domestic market failure can serve as a powerful
basis for protection. This is illustrated by the key
contributions by G. Haberler (EJ 1950) who demonstrates that the
Sanuelson gains from trade theorem breaks down in the presence of
inter-sectoral differences in factor returns and Hagen (QJE 1958) who
concludes that inter-sectoral wage differential provides a legitimate
reason for trade interventions. It is not until Bhagwati and
Ramaswami (1963)--and well after the publication of James
Meade's Trade and Welfare--that the case for free trade in
the presence of domestic distortions is restored to its rightful position. These authors
show that once the domestic distortion is corrected at source, free trade
remains the right policy for a small country. In the specific case of
inter-sectoral wage differential, they show that this prescription
translates into an
appropriate wage subsidy to the sector with higher wage. For this
and many other reasons discussed in the paper and consistent with
Johnson's (1965) but contrary to Corden (1996), the Bhagwati and
Ramaswami paper remains a landmark and classic in international trade.
Consequences for the Elasticity of Demand
for Labor and Wage Outcomes:
(Unpublished) Leamer (1995), Rodrik (1997) and Wood (1995) have suggested, without
qualification, that the demand-for-labor curve is more elastic when an
economy is open than when it is closed.
I demonstrate that this proposition is not valid in general.
The proposition can be violated in both the 2x2 and
Furthermore, many of the results obtained by Rodrik (1997),
assuming the proposition to be true, fail to hold in general when we
spell out the full structure of the model. Thus, within two most popular
models of trade--the 2x2 and specific-factors models--, there is no
guarantee that openness leads to a greater incidence of higher labor
standards being borne by workers or to greater volatility in wage
earnings as a consequence of shocks to the economy.
It is also not true in general that when openness lowers the
bargaining power of workers, it contributes negatively to wages.
In the 2x2 model, exactly the opposite may happen.
Investigations in Anti-dumping and the Super-Additivity Effect: A
(Unpublished) (with Poonam Gupta).
(Unpublished) (with Poonam Gupta). The
empirical literature on anti-dumping shows that ceteris paribus
the probability of a positive finding in injury investigations is
higher when defendants are many and small than when they are few and
Stated precisely, holding the market share of defendant firms
constant, “cumulation,” defined as the practice of aggregating over
the exports of several countries, has a positive effect on the
probability of an affirmative injury determination.
In this paper, we offer a theoretical explanation of this
finding. We show that the presence of many small exporters
exacerbates the free-rider problem that accompanies multiple defendants.
Unlike the dumping margin, which must be determined separately
for each defendant firm, the injury determination is common to all
defendant firms: either all defendants are found guilty of causing
injury to the domestic firm or all are acquitted. To the extent that
defense may be costly, this fact inevitably gives rise to a free-rider
from Preferential Trade Liberalization in the CGE Models: Where do they
Come From?: (Published in Sajal Lahiri, Regionalism and
Globalization, London and New York: Routledge, chapter 3) (with
Rupa Duttagupta). In
a series of papers, Bhagwati and Panagariya (1996), Bhagwati, Greenaway
and Panagariya (1998) and Panagariya (1996, 1997a, 1998) have argued
forcefully that a tariff preference by a country is likely to hurt
itself and benefit its union partner. On
the other hand, Robinson and Thierfelder (1999) argue, “The results
from a large number of model-based empirical studies strongly support a
few robust conclusions about RTAs [Regional Trade Agreements]: (1) they
increase welfare of participating countries; (2) aggregate trade
creation is much larger than aggregate trade diversion…” In
this paper, we subject the CGE models, based on conventional
theory, to a critical examination. We argue that when these models
generate benefits to a country from its own preferential liberalization,
they do so by recourse to models characterized by internally
inconsistent assumptions. And even within the wrong model
structure, the gains are generated by choosing questionable values of
some key parameters.