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

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

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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