How Applicable is An Economic Theory of the GATT to Developing Countries?

According to “An Economic Theory of the GATT” by Bagwell and Staiger (1999), the main purpose of a trade agreement is to escape from a terms-of-trade driven prisoner’s dilemma. This is where all countries have a collective incentive to liberalise trade but an individual incentive to adopt protectionist measures such as tariffs. Recent econometric evidence suggests that even relatively small countries set tariffs to leverage their power on world markets, broadening the applicability of the theory. Subsequent developments of the theory argue that in an uncertain world it is efficient to write a trade agreement as an incomplete contract that does not specify the exact levels of tariffs but instead imposes tariff ceilings that allow a degree of flexibility. Recent research uncovers an intriguing empirical regularity. On average small countries, which tend to be developing nations, set their applied tariff rates further below their tariff bindings than large countries, which tend to be developed, do. The explanation proposed is that larger countries, having more power on world markets than small countries do, have a greater incentive to behave opportunistically by raising their tariffs and hence must be bound more tightly by any agreement that is reached.

Bagwell K. and R. Staiger, (1999); “An Economic Theory of GATT.American Economic Review 89 (1), 215-248. [Working paper version]

Bagwell K. and R. Staiger, (2011); “What Do Trade Negotiators Negotiate About? Empirical Evidence From The World Trade Organization.American Economic Review, 101(4): 1238-73. [Working paper version]

Beshkar M. (2010); “Optimal Remedies in International Trade Agreements.” European Economic Review 54(3), 455-466.

Beshkar M. and E. Bond, (2013); “Cap and Escape in Trade Agreements.” University of New Hampshire and Vanderbilt University typescript. [Working paper version]

Beshkar M., E. Bond and Y.-W. Rho, (2012); “Tariff Binding and Overhang: Theory and Evidence.” University of New Hampshire and Vanderbilt University typescript. [Working paper version]

Broda C., N. Limão and D. Weinstein, (2008); “Optimal Tariffs and Market Power: The Evidence.American Economic Review 98(5), 2032-2065. [Working paper version]

Horn H., G. Maggi, and R. Staiger (2010); “Trade Agreements as Endogenously Incomplete Contracts.American Economic Review, 100(1), 394-419. [Working paper version]

Syropoulos C., (2002); “Optimal Tariffs and Retaliation Revisited: How Country Size Matters.The Review of Economic Studies, 69 (3): 707-727.

International Trade and Conflict

The availability of natural resources can directly affect the prospects of growth of a nation and their geographic distribution is uneven across and within countries. On one hand this can create opportunities for international trade between resource scarce and resource rich countries or, at the national level, generate revenues to be invested in development projects. On the other hand natural resources can feed international conflicts that can escalate to costly wars. Moreover, in countries where property rights are weakly enforced disputes over their control can lead to prolonged civil wars.

Acemoglu D., M. Golosov, A. Tsyvinski, and P. Yared, (2012); “A Dynamic Theory of Resource Wars.” The Quarterly Journal of Economics, 127 (1): 283-331. [earlier version]

Anderson J. E. and D. Marcouiller, (2005); “Anarchy and Autarky: Endogenous Predation as a Barrier to Trade.” International Economic Review, 46 (1): 189–213. [earlier version]

Findlay R. and  K. H. O’Rourke, (2007); Power and Plenty: Trade, War, and the World Economy in the Second Millennium. Princeton University Press, New Jersey

Garfinkel M. R., S. Skaperdas and C. Syropoulos (2008); “Globalization and Domestic Conflict.” Journal of International Economics, 76(2): 296-308. [earlier version]

Garfinkel M. R., S. Skaperdas and C. Syropoulos (2009); “International Trade and Transnational Insecurity: How Comparative Advantage and Power are Jointly Determined.” Working Paper.

Powell R., (1993); “Guns, Butter, and Anarchy.” American Political Science Review, 87: 115–132.

Syropoulos C. and T. Zylkin (2013); “The Problem of Peace: A Story of Corruption, Destruction and Rebellion.” Working Paper.

From Dictatorship to Democracy and Democratic Consolidation

There is considerable debate over whether and how political institutions affect economic performance and vice versa. Does the form of government, democracy or dictatorship, have an important bearing on economic growth and efficiency, and how does growth affect the consolidation of democracy? Under what circumstances is democracy a spur for greater equality, and does inequality spur revolution? An apparently important aspect of this debate is how international influences through trade, the actions of international institutions, and political events in foreign countries, affect political regime change, say from dictatorship to democracy, and political consolidation on peaceful government after civil war or revolution.

Acemoglu D. and J. A. Robinson, (2001); “A Theory of Political Transitions.” American Economic Review, 91(4): 938-963. [earlier version]

Aidt T. and P. S. Jensen, (2012); “Workers of the World, Unite! Franchise Extensions and the Threat of Revolution in Europe, 1820-1938.” Cambridge Working Papers in Economics 1102, Faculty of Economics, University of Cambridge.

Aidt T., F. Albornoz and M. Gassebner (2012); “The Golden Hello and Political Transitions.” CESifo Working Paper Series 3957, , CESifo Group Munich.

Ellis C. J. and J. Fender (2011); “Information Cascades and Revolutionary Regime Transition.” Economic Journal 121(551): 763792.

Ornelas E. and X. Liu, (2012); “Free Trade Agreements and the Consolidation of Democracy.” Working Paper, London School of Economics.

The Quest for Prosperity: How Developing Economies Can Take Off

“How can developing countries grow their economies? Most answers to this question center on what the rich world should or shouldn’t do for the poor world. In The Quest for Prosperity, Justin Yifu Lin–the first non-Westerner to be chief economist of the World Bank–focuses on what developing nations can do to help themselves…” [Publisher’s book website]
Reviews / Comments
Book review by Monika Kerekes in Journal of Economics, 109(1), May 2013.

Book review by Xuan Nguyen in The Journal of International Trade & Economic Development, 22(2), April 2013

Book review by Ashley Aarons in Donor Committee for Enterprise Development (DCED), April 2013

Book review by Richard N. Cooper in Foreign Affairs, January/February 2013.

Pragmatic search for path to prosperity by Martin Wolf in Financial Times, October 2012.

Book review by Howard Davies in Times Higher Education, October 2012.

What do IMF Structural Adjustment Programmes Achieve?

Among the stated aims of the International Monetary Fund (IMF) is to promote high employment and sustainable economic growth, and reduce poverty around the world.  And yet there is considerable debate over how successful it has been at accomplishing these objectives.  One view is that it manages a considerable degree of success in institutional environments where growth is extremely difficult to establish.  Another is that the IMF prioritises the interests of creditor nations at the expense of the poor in donor countries.  Recently, evidence has emerged that IMF programmes may even contribute to the eruption of violence in debtor nations as people protest against the austerity measures that structural adjustment programmes entail.

Barro R. J. and J.W. Lee, (2005); “IMF-Programs: Who Is Chosen and What are the Effects? Journal of Monetary Economics 52(7): 1245-1269. [Earlier version]

Bird G. and D. Rowlands, (2001); “IMF Lending: How is it Affected by Economic, Political, and Institutional Factors?The Journal of Policy Reform 4 (3), 243-270.

Bird G. and D. Rowlands, (2002); “The Pattern of IMF Lending: An Analysis of Prediction Failures.Journal of Policy Reform, 5(3), 173-186.

Boughton J. (2001); Silent Revolution: The International Monetary Fund, 1979-1989. International Monetary Fund, Washington D.C..

Conway P., (1994); “IMF Lending Programs: Participation and Impact.Journal of Development Economics, 45(2), 365-391.

Dreher A. and N.M. Jensen, (2007); “Independent Actor or Agent? An Empirical Analysis of the Impact of US Interests on IMF Conditions.The Journal of Law and Economics, 50(1): 105-124. [Earlier version]

Easterly W., (2005); “What did Structural Adjustment Adjust? The Association of Policies and Growth with Repeated IMF and World Bank Adjustment Loans.Journal of Development Economics, 76(1): 1-22. [Earlier version]

Guimond M. F., (2007); “Structural Adjustment and Peacebuilding.” International Development Research Centre, Conflict and Development Program Initiative, 2005-2006. [Earlier version]

Hartzell C.A., M. Hoddie, and M. Bauer, (2010); “Economic Liberalization via IMF Structural Adjustment: Sowing the Seeds of Civil War?” International Organization, 64(2): 339-356.

Stiglitz J., (2002); Globalization and Its Discontents, Penguin Books, London, UK.

Stroup C. and B. Zissimos, (2013); “Social Unrest in the Wake of IMF Structural Adjustment Programs.”  CESifo Working Paper NO. 4211.

Walton J. and D. Seddon, (1994); Free Markets and Food Riots: The Politics of Global Adjustment. Blacwell, Cambridge Mass., US.