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The author is Assistant Professor at Korea University and was an Economist in the IMF’s Research Department when this work was completed. He holds a Ph.D. from Harvard University. The author appreciates helpful comments on earlier versions of this paper from Susan Collins. William Easterly, Greg Mankiw, Phil Swagel, Peter Wickham, and seminar participants at Harvard University and the World Bank. He is greatly indebted to Robert Barro for valuable insights and advice. He also wishes to thank Catherine Fleck for editorial assistance.
For work on the research and development side, see Grossman and Helpman (1990) and Rivera–Batiz and Romer (1991). For human capital accumulation, see Lucas (1988) and Romer (1990). For learning–by–doing, see Krugman (1987), Lucas (1988), and Young (1991).
Quantitative restrictions on imports can also be considered to increase the domestic price of foreign inputs equivalently.
If consumer goods are imported and trade distortions are imposed on the imports of both consumer and producer goods, a change in p can be smaller than τ with the increase in the domestic price of output, which depends on the substitutability between foreign and domestic consumer goods.
The role of government expenditure as a productive input for private production is considered later in this section. Barro (1990, section 4) considers the case where government provides services that directly increase households’ utility. For small tariff rates, assumptions about tariff revenue make little difference.
It is assumed that initial income is not plagued by the same trade distortion that influences the steady–state income. If the same distortionary trade policy has prevailed over the whole period, its effects on the transitional growth rates become smaller by a factor of α and the revenue effect disappears.
This result is obtained by taking the limit of the last log term in equation (29) and using l’Hopital’s rule.
In 1988, the average import share in GDP was 0.37 in the World Bank (1990) World Tables, but was 0.20 in 1985 for all countries in Summers and Heston (1991). When total imports for each country are disaggregated at the five–digit SITC level according to the United Nations’ (1976) “Classification by Broad Economic Categories.” imports of capital goods and of intermediate goods were 73 percent of total imports on average in 1988. It was assumed that under free trade the import shares would be higher than these figures.
It is assumed that the government purchases private output and then makes it available as inputs to producers in the private sector.
"Rival” means that no person can enjoy the good without decreasing another person’s enjoyment, and “excludable– means that it is possible to exclude a person from the enjoyment of the good if he is not willing to pay the price. For the case of public goods, which are nonrival or nonexcludable, see Barro and Sala–i–Martin (1990).
The lowest growth rate is bounded by – δ, assuming that investment is irreversible.
Many studies on the black market show this result in a general equilibrium framework (see, for example, Nowak (1984)).
1f the illegal transactions cost is not prohibitive, or if exporters have to surrender only a portion of their export proceeds, the marginal rate for exporters will be a weighted average between the official and the black market rate.
For those six OECD countries—Austria, Finland, Norway, Sweden. Switzerland, and New Zealand—an import–weighted average tariff rate on imports of semimanufactures is used.
In most of the countries, the tariff rate has been reduced over the sample period. However. I suspect that the ranking in tariff rates has not varied much among the countries.
In previous versions of this paper data from the World Bank’s (1990) World Tables are used. The following basic regression results do not depend on the measure of the import share. Conceptually, the import share from Summers and Heston seems to be a correct measure, considering that the growth rate of income comes from the same source.
Distance data are taken from Fitzpatrick and Modlin (1986) and the bilateral import data come from the IMF’s Direction of Trade Statistics.
There are a number of studies that emphasize natural resource endowments and distances to determine trade volumes in free trade: for example, Bergsten and Cline (1985), Bergstrand (1985, 1989), and Lawrence (1987).Learner (1984, 1988) presents various measures of trade volume under free trade, based on a Heckscher–OhIin model at the three–digit SITC level. Unfortunately the number of countries included in his studies is too small to use in this study.
The population growth variable, x + n + δ, has been dropped as it is insignificant and does not change any of the following conclusions.
This result contradicts empirical findings by Levine and Renelt (1990) and Fischer (1991) that the black market premium is always insignificantly related to the growth rate, when the investment rate is controlled. However, they have used the premium itself in the estimation as well as smaller samples of countries.
Another interesting experiment is to test the significance of trade distortions alone, without interaction with π, as in equation (43). Unfortunately, high correlations between independent variables, such as (1 + tariff) and 741 tariff), make it impracticable.