Abstract

Liberal trade policies complemented by appropriate macroeconomic and other structural policies in Fund-supported adjustment programs have an important impact on allocative efficiency and thereby on economic growth. Trade reform also contributes to improved transparency and good governance by reducing incentives for lobbying for trade protection and opportunities for rent seeking and by eliminating administrative discretion. These factors underline the importance of trade reform as a key component of structural adjustment efforts.

Liberal trade policies complemented by appropriate macroeconomic and other structural policies in Fund-supported adjustment programs have an important impact on allocative efficiency and thereby on economic growth. Trade reform also contributes to improved transparency and good governance by reducing incentives for lobbying for trade protection and opportunities for rent seeking and by eliminating administrative discretion. These factors underline the importance of trade reform as a key component of structural adjustment efforts.

The study found that some two-thirds of countries covered by the review started Fund-supported programs with relatively restrictive trade regimes, as measured by the index of restrictiveness. Most programs targeted a marked reduction in trade restrictiveness and the targets were, for the most part, achieved. However, a significant number, including those starting with highly restrictive regimes, did not target any quantifiable change in restrictiveness. The results of the study underline the need to target more substantial trade liberalization as an important objective of Fund-supported programs, and particularly in cases where the regime is restrictive.

With respect to the ambitiousness of trade reform efforts, among the programs reviewed, a significant number targeted extensive trade reform, while others targeted limited or no liberalization. An appropriately ambitious pace of reform depends crucially on country-specific circumstances. However, a number of factors may be seen as relevant to the pace of moving toward an open trade regime. These include the initial degree of restrictiveness of the trade system (particularly, the extent of highly distortionary NTBs), the standard set by the good practice countries that have succeeded in moving from restrictive to open trade regimes over a seven- to -ten-year period, and the nature of the constraints facing the authorities, including nontrade factors such as administrative capacity and short-term adjustment costs. These factors may be used to determine the appropriate pace of reform for countries with restrictive or moderate trade regimes to move to open trade systems, and the extent to which trade liberalization should be frontloaded, including through prior actions, and monitored through binding conditionality. Also, these factors may contribute in determining the sequencing of trade reform measures, for example, on the desirability of designing trade reform so that quantitative restrictions are reduced before tariff reform.

The experience of the case study countries and the good practice countries shows that trade reform is a medium- to long-term process. The longer-term nature of trade reform highlights the importance of well-specified and comprehensive program targets for trade reform. This study found that medium-term targets were generally not detailed enough to permit monitoring of their implementation and often focused on only one or two components of the trade regime. Further, these targets were generally not supported by intermediate steps or nontrade measures that would facilitate their achievement. Well-specified medium-term targets appear to have aided program implementation, in those countries that used them, such as Sri Lanka, as did public preannouncement of the program’s medium-term trade reform objectives. This indicates the need for increased emphasis on formulating more specific and detailed medium-term trade reform targets, together with intermediate steps and supporting nontrade measures, and that these should preferably be publicly announced at the start of Fund-supported programs.

Fiscal considerations were the main factor cited as having influenced trade reform objectives during program design and negotiation stages. The review of multiyear Fund arrangements in this study found no direct relationship between the strength of trade reform objectives and achievements and countries’ initial fiscal circumstances. The initial fiscal impact of trade reform is not necessarily adverse and will depend on country-specific circumstances and the mix of components in the trade reform package. Certain elements of trade reform are likely to increase fiscal revenue, particularly replacing QRs and other NTBs with tariffs, and eliminating customs duty exemptions and trade-related subsidies. This suggests that trade reform should be as broad based as possible and include these elements in the initial stages of reform. Even where the first-round fiscal effects of trade reform are negative, alternative, less distortionary sources of fiscal revenue should be mobilized to the extent feasible. This also underscores the need for providing appropriate technical assistance at an early stage to facilitate the phasing in of trade liberalization. Indeed, the case studies indicate that some countries facing apparently difficult fiscal circumstances were nevertheless able to liberalize quickly and successfully by designing appropriate supporting reforms.

The study indicates that cooperation with other international organizations, particularly the World Bank, facilitates trade reform. The Bank was involved in the area of trade reform in most of the Fund-supported programs included here and all of the case study countries, and virtually all trade liberalization in the period studied took place in the context of these programs. This underscores the importance of Fund-Bank collaboration in the area of trade policy. Moreover, the Fund has strengthened its collaboration with the WTO to ensure policy consistency between the two institutions with regard to common members. Regional trading arrangements influenced trade reform in some countries covered by the review and the case studies. Moreover, the number of RTAs has been growing rapidly in recent years. Recognizing these factors, the Fund should where appropriate seek to expand its dialogue with regional organizations to cover trade policy.

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