Preferential Liberalization and Its Economy-Wide Effects in Honduras

Medvedev, Denis

Preferential Liberalization and Its Economy-Wide Effects in Honduras

2008

Medvedev, Denis

This paper quantifies the likely benefits of trade and investment liberalization in a small, poor, open economy, using the accession of Honduras to the Dominican Republic-Central American Free Trade Agreement as a case study. The results show that bilateral trade liberalization with the United States is likely to have almost no effect on welfare in Honduras, while the reciprocal removal of protection vis-a-vis the rest of Central America would lead to significantly larger gains. Potential gains from increased net foreign direct investment inflows overwhelm those expected from trade reform alone, particularly if the new foreign direct investment generates productivity spillovers. However, if it is to replace Honduran investment rather than complement domestic capital formation, growth performance is unlikely to improve and may even suffer. The paper's results identify several areas for policy attention by Honduran policy makers to make the Dominican Republic-Central American Free Trade Agreement more development-friendly. These include carefully considering the budgetary implications of trade reform, widening social safety nets to counter the trends toward increasing income inequality, and sequencing the reforms to ensure a close alignment of Honduras' comparative advantage on the regional and global markets.

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AGROVOC Keywords

agricultural commodities agricultural products agriculture balance of payments capacity building capital formation consumer preferences consumers debt dispute settlement domestic consumption economic implications elasticity exports external debt food prices free trade gnp growth rate imperfect competition import import quotas imports income international trade inventories market access natural resources private investment productivity public debt public expenditure public investment remittances trade barriers trade facilitation trade liberalization uncertainty unemployment value added wages wto

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Publisher

World Bank, Washington, DC

Other Subjects

Liberalization of trade; Investment climate; Supply side; Preferential trade; Total investment; Low tariff; Marginal propensity to save; Regulatory frameworks; Investment goods; Generalized system of preferences; World price; Import tariffs; General equilibrium; Public spending; Import prices; Foreign debt; Balance of payment; Remittance; Trading partners; Average tariff; Market share; Constant elasticity of substitution; Consumption levels; Gdp; Constant elasticity of transformation; Bilateral agreement; Tariff data; Global demand; Adverse effects; Tariff rate; Base year; Increasing returns to scale; Uncertainties; Demand curve; Capital income; Weights; Labor market; Trade policy; Dependent variable; Average tariffs; Common market; Domestic producers; Benchmark; Macroeconomic effects; Textile tariff; Relative prices; Total factor productivity; International financial statistics; Capital stock; Exporters; Investment demand; Factor markets; World market; Labor force; Macroeconomic variables; Growth performance; Total exports; Investment spending; Trade diversion; Demand shocks; Central bank; Domestic goods; Income elasticity; Unilateral liberalization; Apparel; Tariffs on imports; Export supply; Full liberalization; Unskilled labor; Tariff rates; Annual growth; Shortfall; Fiscal deficit; Total imports; Relative price; Zero tariff; Trade reform; Export growth; Foreign capital; External protection; Real gdp; Balance of payments constraint; Wage differentials; Import content; Domestic demand; Utility functions; Technical assistance; Import competition; Monopolistic competition; International capital flows; Consumer surplus; Trading partner; Income elasticity of demand; Consumption basket; Unemployment rate; Price index; Unskilled workers; Aggregate investment; Private capital; Disposable incomes; Price fluctuations; Full trade liberalization; Concessions; Private consumption; Adverse consequences; Demand growth; Increasing returns; Government bonds; Comparative advantage; Expenditure function; Investment inflows; Productivity growth; Income growth; Intermediate goods; Income elasticities; Total debt; Tariff barriers; Current account balance; Capital stocks; Rate of growth; Current account; Free access; Imbalances; Constant returns to scale; Forecasts; Intermediate inputs; Gdp per capita; World prices; Optimization; Total output; Global market; Bilateral trade; Welfare gains; Global markets; Export orientation; Capital accumulation; Lost tariff revenue; Domestic prices; Labor market segmentation; Disposable income; Export markets; Commodity price; Tariff reductions; Expansion of exports; Equilibria; Safety nets; Free trade agreement; Multilateral liberalization; Open economy; Export shares; Exporter; Tariff revenues; Debt service; Export volumes; Export volume; Growth projections; Export prices; Transition matrix; Real exchange rate; Uruguay round; Neoclassical models; Foreign direct investment; Labor markets; Elasticity of substitution; Growth rates; Multilateral trade; Domestic price; Tariff reduction; Import demand; Capital inflows; Investment liberalization; Utility function; Protection data

License

Policy Research Working Paper; No. 4537http://creativecommons.org/licenses/by/3.0/World BankCreative Commons Attribution CC BY 3.0 Unported

Source

Policy Research Working Paper; No. 4537

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Preferential Liberalization and Its Economy-Wide Effects in Honduras

2008

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