International Trade, Distortions and Long-Run Economic Growth

IMF Working Papers, November 1, 1992

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Neoclassical model of an open economy in which domestic production requires both domestic and imported inputs.
Incorporates government-induced trade distortions such as:
- tariffs
- exchange controls
Model result: trade distortions generate cross-country divergences in:
- growth rates
- per capita income

over a long transitional period.

Empirical results confirm model predictions.
Key empirical relationships identified:
- Tariff rates have significant negative effects on the growth rate of per capita income.
- Black market premia have significant negative effects on the growth rate of per capita income.
- The negative effects operate through interaction with an estimate of the share of free trade imports.
Magnitude: effects are "in the orders of magnitude predicted by the model" (as stated in the source).

Policies that reduce trade distortions (for example, lowering tariff rates and relaxing exchange controls) would be expected to:
- Reduce cross-country divergences in growth rates and per capita income during the transitional period.
- Improve long-run growth performance by increasing access to imported inputs and reducing distortions in production.

Subject: International trade, National accounts, Personal income, Tariffs, Taxes, Trade barriers, Trade liberalization, Trade policy
Keywords: free trade, import share, open economy, Personal income, production function, saving rate, Sub-Saharan Africa, tariff rate, Tariffs, Trade barriers, trade distortion, Trade liberalization, Trade policy, WP