PoliticalEconomyOfTradePolicy-Afontsev

8/9/2019 PoliticalEconomyOfTradePolicy-Afontsev

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Political Economy ofPolitical Economy ofTrade PolicyTrade Policy

Sergey A. AfontsevSergey A. Afontsev

Institute for World Economy andInstitute for World Economy and

International Relations,International Relations,

Moscow, RussiaMoscow, Russia


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Welfare ParadoxesWelfare Paradoxes

of Trade Policyof Trade Policy InIn the real world, all countries practicethe real world, all countries practice

trade barriers in one form or anothertrade barriers in one form or another

Choice of trade policy instruments isChoice of trade policy instruments isoften ineffectiveoften ineffective

Traditional models usually produceTraditional models usually produce

unexpectedly low estimates ofunexpectedly low estimates ofprotectionprotection--generated lossesgenerated losses


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WHY ?WHY ?


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Principles of Political EconomyPrinciples of Political Economy

ApproachApproach

Decisions of policy makers reflect their ownDecisions of policy makers reflect their own

preferences and interests, rather than interestpreferences and interests, rather than interestof the general public. People engaged inof the general public. People engaged inpolicy making, just like people engaged inpolicy making, just like people engaged inordinary economic activities, are driven byordinary economic activities, are driven byselfself--interest.interest.


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Principles of Political EconomyPrinciples of Political Economy

ApproachApproachPolitics can be viewed as a sort of market wherepolicy decisions are sold for political support and

resource transfers.

Trade policy is determined endogenously:Economic agents enter political markets to

influence trade policy, which in turn affects theirposition on economic markets and incentives forinfluencing future trade policy.


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Traditional (Traditional (Ad HocAd Hoc) Political) Political

Economy HypothesesEconomy Hypotheses The pressure group hypothesis attaches the key role to the demand

for trade policies by lobbies representing sectoral interests

The adding machine hypothesis stresses politicians desire to attract

voters by implementing trade policies The status quo hypothesis presents trade policy as an insurance

against shocks injuring national industries

The revenue maximization hypothesis addresses the fact that trade

policies can generate additional budget revenues

The foreign repercussions trade negotiation hypothesis interpretsnational trade policy decisions in the context of multidimensional

system of economic and political interactions with other countries

The ideological preference hypothesis states that ideology of the

ruling party can exercise strong influence on trade policy decisions


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Traditional (Traditional (Ad HocAd Hoc) Political) Political

Economy HypothesesEconomy HypothesesThe major problem with these hypotheses

is that they are formulated on a ratherad

hocbasis and do not rest on any coherenttheoretical model.

Moreover, they often produce equivocal

predictions about the impact of differentpolitical economy factors on trade policies.


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GrossmanGrossman--Helpman ModelHelpman Model

The first coherent theoretical model of

endogenous trade policy formation was put

forward by G.Grossman and E.Helpman (1994).

It focuses on the interaction between pressuregroups representing owners of factors specific to

particular industries and the government

interested in resource transfers from these

groups and welfare of the general public,attaching different weights to each of them.


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GrossmanGrossman--Helpman ModelHelpman Model

Predictions of Grossman-Helpman model

In industries represented by lobbies, protectiondecreases with higher import penetration.

In unorganized industries, on the contrary,relationship between import penetration and tradeprotection is positive.

Deviations from free trade are more likely inindustries with low import demand and/or exportsupply elasticities, as low elasticities are associatedwith lower welfare losses for any given level ofprotection.


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Empirical Tests of PoliticalEmpirical Tests of Political

Economy ModelsEconomy ModelsAd Hoc ModelsAd Hoc Models

Trade protection tends to be higher inTrade protection tends to be higher in laborlabor--intensive, lowintensive, low--skill, lowskill, low--wage, stagnant industries;wage, stagnant industries; industries with high and/or raising import penetration;industries with high and/or raising import penetration;

industries producing consumer rather than producer goods,industries producing consumer rather than producer goods,

and more generally in industries producing goods forand more generally in industries producing goods for

unorganized buyers;unorganized buyers; industries with intensive intraindustries with intensive intra--industry trade.industry trade.

Ideological preferences were also found to influence tradeIdeological preferences were also found to influence trade

policies.policies.


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Economy ModelsEconomy ModelsGrossmanGrossman--Helpman ModelHelpman Model

A number of empirical tests ofGrossmanA number of empirical tests ofGrossman--Helpman modelHelpman modelfound support for its general logic, but at the same timefound support for its general logic, but at the same time

produced a quite unexpected result that the weight attachedproduced a quite unexpected result that the weight attached

by the government to the welfare of citizens is often higherby the government to the welfare of citizens is often higher

than the weight attached to resource transfers from pressurethan the weight attached to resource transfers from pressure

groups or even exceeds it.groups or even exceeds it.


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Economy ModelsEconomy Models -- RussiaRussiaAdAd hhococ mmodelsodels

Empirical tests ofEmpirical tests ofad hocad hocpolitical economy models providepolitical economy models providepartial support forpartial support for

the pressure group hypothesisthe pressure group hypothesis

the status quo hypothesisthe status quo hypothesis

the adding machine hypothesisthe adding machine hypothesis the revenue maximization hypothesisthe revenue maximization hypothesis


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Economy ModelsEconomy Models -- RussiaRussiaTheeTheextended Grossmanxtended Grossman--HelpmanHelpman mmodelodel

In the extended GrossmanIn the extended Grossman--Helpman model where theHelpman model where the

government is assumed to take special care ofgovernment is assumed to take special care ofbudget income, tariff revenues have the highest rankbudget income, tariff revenues have the highest rankin governments preference schedule, then followsin governments preference schedule, then followswelfare of citizens, with lobbying contributions havingwelfare of citizens, with lobbying contributions havingthe lowest rank.the lowest rank.

Empirical results strongly favor the extendedEmpirical results strongly favor the extendedGrossmanGrossman--Helpman model against alternativeHelpman model against alternative ad hocad hocspecifications.specifications.


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Economy ModelsEconomy Models -- RussiaRussia

Empirical analysis in the framework of theextended Grossman-Helpman modelshows that governments desire toincrease budget revenues by suppressingmisclassification of higher-taxed goods for

lower-taxed ones induced import tariffstructure to be more uniform in 2002 thanit would have been otherwise.


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Towards More EffectiveTowards More Effective

Trade PolicyTrade PolicyIn addressing the question of welfareIn addressing the question of welfare--

improving policy reform, political economyimproving policy reform, political economy

literature concentrates on forces behindliterature concentrates on forces behinddistortive trade policies and opportunities todistortive trade policies and opportunities to

limit their influence.limit their influence.


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Towards More EffectiveTowards More Effective

Trade PolicyTrade PolicyMajor factors favoringless distortivepoliciesMajor factors favoringless distortivepolicies

emergence of new political market actors with aemergence of new political market actors with a

policy demand for free trade;policy demand for free trade;

internal policy commitments (tariff unification,internal policy commitments (tariff unification,

simplification of tariff structure) and institutionalsimplification of tariff structure) and institutional

mechanisms;mechanisms;

external obligations of a country concerning tradeexternal obligations of a country concerning tradepolicy (made in the context of the WTOpolicy (made in the context of the WTO

negotiations, regional agreements, etc.).negotiations, regional agreements, etc.).


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General Assessment of theGeneral Assessment of the

Political Economy ApproachPolitical Economy ApproachThough political economy models have stillThough political economy models have still

not reached the degree of theoretical andnot reached the degree of theoretical and

empirical sophistication characteristic ofempirical sophistication characteristic of

traditional trade theory models, theytraditional trade theory models, they

provide useful insights into realprovide useful insights into real--world tradeworld trade

policy decisions and mechanisms topolicy decisions and mechanisms toimprove their efficiency.improve their efficiency.

PoliticalEconomyOfTradePolicy-Afontsev

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