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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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Empirical Tests of PoliticalEmpirical Tests of Political
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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Empirical Tests of PoliticalEmpirical Tests of Political
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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Empirical Tests of PoliticalEmpirical Tests of Political
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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Empirical Tests of PoliticalEmpirical Tests of Political
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.