T. N. Srinivasan

Outward-Orientation and Development: Are Revisionists Right?

The costs of import substitution (IS) as a strategy for industrialization, which was deemed synonymous with economic development by many development economists of the fifties and sixties, were shown to be substantial in the influential and nuanced studies of the seventies and eighties under the auspices of OECD, NBER and World Bank. These studies played a critical role in shifting policies in several developing countries away from the IS strategy. Recently there has been a proliferation of cross country regressions as a methodology of analysis of issues relating to growth, trade and other issues. Both proponents (e.g. Sachs and Warner (1995)) and opponents (Rodriguez and Rodrik (1999)) of the view that openness to trade is linked to higher growth have relied on such regressions. The paper systematically reviews the theoretical and empirical studies on such linkage. It rejects the cross-country regression methodology for reasons of their weak theoretical foundation, poor quality of their data base and their inappropriate econometric methodologies. It argues that the most compelling evidence on this issue can come only from careful case studies of policy regimes of individual entries such as those of OECD, NBER and World Bank. It concludes that the virtues of openness established in these nuanced in-depth studies remain unrefuted.

Revenue Seeking: A Generalization of the Theory of Tariffs

The theory of commercial policy has recently addressed three phenomena: (i) tariff (quota) seeking or lobbying by potential beneficiaries for the imposition of a tariff (quota), (ii) tariff (quota) evasion, and (iii) rent seeking or lobbying for getting an allocation of the import quota to earn the rents generated. Revenue seeking or lobbying to secure a share in the disposition of the tariff revenues is analyzed here. it is shown that revenue seeking may, even for a small country, result in a reduction in importable output. Furthermore, revenue seeking may be welfare improving. Rent seeking may be welfare improving as well.

Shadow Prices for Project Selection in the Presence of Distortions: Effective Rates of Protection and Domestic Resource Costs

The paper addresses the problem of deriving shadow prices for use in project evaluation when the existing allocation is characterized by ad valorem trade distortions. The analysis is used to clarify and resolve the long-standing debate among effective-rate-of-protection and domestic-resource-cost proponents as to the respective merits of their measures as methods of project evaluation. The derivation of shadow factor prices is then extended to three major factor market imperfections familiar from extensive trade-theoretic analysis.

Optimal trade policy and compensation under endogenous uncertainty: The phenomenon of market disruption

Abstract The paper examines the nature of optimal policy intervention required in the exporting country when there is the possibility of a market-disruption-induced trade restriction being invoked by the importing country. The analysis is conducted primarily with a two-period model, with and without adjustment costs, and the results are related to the well-known policy prescriptions of Bhagwati, Ramaswami, Srinivasan, Johnson et al. in the theory of trade and welfare. The last section extends the argument briefly to steady state analysis. The applicability of the analysis to the symmetric, embargo problem is also noted.

The General Equilibrium Theory of Effective Protection and Resource Allocation

The theory of effective rate of protection (ERP) has been developed in recent years in an attempt to seek a concept G,? protection which, in the presence of traded inputs, would be able to perform analytically the role that nominal tariffs played in the “older’“, traditional theory which was premised on a model which excluded traGed inputs. Thus, in the Zraditional model, with two traded goods produced with standard restrictions on the production function? by two primary factors in given endowment, and the small-country assumption, a tariff on a good would lead to: (i) a rise in the (gross) output of the protected good; (ii) a rise in the nominal value of its output; (iii) a rise in the use of each primary factor therein; (iv) a rise in the real value-added therein (which coincides with output, when real value-addeC is defined as deflated by the price of “own output”); and (;lr) a rise in the nominal value-added therein (which coincides of course with the nominal value r Thanks are due to the National Science Foundation for supporting the research reported in this paper. We have had the benefit of correspondence and/or mutual discussions over the last year with Chulsoon Khang and, in particular, Michael Bruno, whose paper (1973) in this Symposium complements ours admirably. The careful comments of John Chipman have also led to many improvements. Above all, we are greatly indebted to Yasuo Uekawa whose extremely careful reading has resulted in the removal of errors from earlier drafts. 2 These should be linear homogene NIS, concave, and factor-intensities should difFer in equilibrium.

Credit and sharecropping in agrarian societies

This paper considers a model of linkage between land, labor and credit transactions in the context of sharecropping. The papers objectives are: a) to derive and characterize the equilibrium in a model of a land-scarce, labour-abundant economy under sharecropping, given an infinitely elastic supply of identical sharecroppers at a reservation utility; and b) to demonstrate that in an imperfect market, a landlord may offer credit to his tenant, sometimes even at a subsidized rate of interest, without necessarily insisting that the sharecropper borrow only from him, precluding an involuntary linkage between credit and land transations. It has been demonstrated that regardless of the presence or absence of linkage or any other control by the landlord, as long as he can vary the size of the plot given to a tenant and there are enough potential tenants, in equilibrium contracts a tenants utility under sharecropping will be the same as that which he could have obtained as a full-time wage laborer. This result implies that policies other than land reform will not affect the welfare of tenants.

On the Choice Between Capital and Labour Mobility

Trade theorists, since the pioneering work of Kemp (1966). have considered the question of national advantage from international factor mobility by considering only one factor to be so mobile. Kemp analyzed elegantly the question of optimal policies in 2 x 2 x 2 model and showed that, since monopoly power could exist in both the goods and factor markets in consequence of international capital mobility, the optimal policy intervention would generally involve two policy instruments: tariffs (-cum-subsidies) on goods and duties(-cum-subsidies) on international capital flows. Jones (1967) subsequently extended Kemp’s argument to the secondbest context by examining the optimal level of one of these instruments when the other was arbitrarily set at zero. Elsewhere in this issue, Brecher (1983) shows, in an elegant and original contribution, that the Jones policy problem is, in fact, a third-best, rather than a second-best, problem, as generally believed, and that if only one of the tariff and capital mobility taxes(-cumsubsidies) can be used, it is generally possible to improve welfare further by admitting an altogether different, domestic policy instrument: namely a production or consumption tax-cum-subsidy, as the case may be.’ *The research of Bhagwati was supported by the German Marshall Fund Grant No. l-34015. The problem analyzed in the paper was posed in Bhagwati (1979) and an early ingenious and neglected analysis in Ramaswami (1968) was noted by Bhagwati. We have profited greatly from these contributions; also from reading Webb (1970), Ramaswami (1970) and a recent paper of Calvo and Wellisz (1983) on this problem. ‘This result is in consonance with the results of Bhagwati, Ramaswami and Srinivasan (1969) for the case without international capital mobility; but the consonance is ‘intuitive’ only after the result was established for the case with international capital mobility.

International factor movements, commodity trade and commercial policy in a specific factor model

Two events in the decade of the 1970s had a major impact on world trade and factor movements: the collapse of the Bretton-Woods fixed-exchange rate system and OPEC’s success in raising petroleum prices. The enormous current account surplus accruing to some of the OPEC members was successfully recycled by the international capital markets to, among others, the oil-importing developing countries. In addition, the vastly increased tempo of investment in the capital-rich labour-poor OPEC members in West Asia attracted migration of labour (skilled as well as unskilled) to these countries from some of the oil-importing developing countries. The remittances from these workers in turn eased the problem of the labourexporting countries in adjusting to the increased cost of oil imports. Thus, both borrowing from private capital markets and export of labour became very important elements in cushioning the oil shock for a number of countries. The post-OPEC movements of labour and financial capital, while dramatic, are only the more recent instances of a phenomenon of much greater antiquity. The seventeenth and eighteenth centuries saw vast migration of people out of Europe, though these movements were the result of conquests and colonization rather than movements from one sovereign state into another. But the nineteenth century, particularly the latter half, saw migration of the latter kind from Europe to countries of North and South America, as well as capital investment by residents of Europe in these

DUP Activities and Economic Theory

Abstract This paper considers the theory of Directly Unproductive Profit Seeking (DUP) activities, examining its implications for economic theory. Two classes of DUP activities are distinguished: one where the DUP activity is triggered by policy which is itself exogenously specified (e.g., tariff-revenue seeking resulting from pre-specified tariff); the other where DUP activity endogenises policy fully (e.g., tariff seeking). Implications for both positive and normative argumentation in economic theory are considered in depth for both these classes of DUP activity.

Domestic Distortions, Tariffs, and the Theory of Optimum Subsidy: Some Further Results

Bhagwati and Ramaswami (1963) showed that if there is a distortion, the Paretian first-best policy is to intervene with a tax (subsidy) at the point at which the distortion occurs. Hence a domestic tax-cum-subsidy with respect to production would be first-best optimal when there was a domestic distortion (defined as the divergence between domestic prices and the marginal rate of transformation in domestic production) just as a tariff policy would be first-best optimal under monopoly power in trade (which involves a foreign distortion). An important corollary, for the case of a distortionary wage differential, is that while a tax-cum-subsidy policy with respect to factor use would be first-best optimal. the second-best optimal policy would be a domestic production tax-cum-subsidy rather than a tariff policy. While these central results are valid, Kemp and Negishi (1969) have correctly argued that two subsidiary propositions of Bhagwati and Ramaswami (1963) are false. These are (1) that no tariff (export subsidy) may exist which is superior to free trade in the presence of a domestic distortion, and (2) that no production tax-cum-subsidy may yield greater welfare than nonintervention when the nation has monopoly power. We can demonstrate, however, that the Kemp-Negishi results are, in fact, special cases of the first of the following two theorems in the theory of second-best, which we shall prove: Theorem 1.-If under laissez faire two of the variables DRS, DRT, and FRT are equal while the third has a different value, and the policy measure that will secure equal values of the three variables cannot be applied, some