Effective Protection, Policy Appraisal and Trade Policy Reform - Economics Assignment Help

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INTRODUCTION
MAX CORDEN made seminal contributions to the theory of effective protection, most notably Corden (1966) but also Corden (1969) and (1971a). As Max acknowledges in an Appendix to The Theory of Protection (Corden, 1971b), he did not discover a new concept as such; economists includ- ing Taussig, Haberler and Meade, as well as practitioners, were aware that in thinking about protection it was a mistake to focus on output tariffs, ignoring input tariffs. But Corden was among the ?rst to articulate the concept system- atically and to articulate it in such a way as to provide a coherent analytical framework to applied economists and policy makers. And those papers have stimulated an enormous literature. Indeed it is doubtful whether any other single contribution, in a long and distinguished career, has stimulated more work. There is certainly nothing which has contributed more to policy appraisal/policy
reform.

That the concept has had such an in?uence and been estimated so extensively is, for some, surprising on the grounds that it is ‘fatally ?awed’. That was cer- tainly the view of Bhagwati and Srinivasan (1973), Ethier (1977) and Anderson (1998) among others. Yet it has not only survived such critiques; as an input into

DAVID GREENAWAY and CHRIS MILNER are from the University of Nottingham. An earlier draft of this paper was presented at ‘Trade, Exchange Rate Regimes and Growth: A Conference in Honour of Max Corden’, School of Advanced International Studies, Johns Hopkins University, Washington DC, 19 April, 2002. The authors are grateful for comments from the paper’s Discus- sant, Will Martin, as well as observations from Max Corden, Ron Jones, Peter Neary and Martin Wolf. They acknowledge ?nancial support from the Leverhulme Trust under Programme Grant F114/ BF. applied trade analysis it has ?ourished. Is it because, as Anderson argues, ‘. . . applied economists have calculated effective rates of protection in cheerful disregard of the critique . . .’ or is it because ‘the critique’ itself missed some important points? That is the focus of this paper, the remainder of which is organised as follows: Section 2 reviews the basic effective protection concepts and the critique of their design. Section 3 surveys the literature on effective protection in policy appraisal and Section 4 its role in policy reform. In both these sections we pay particular attention to the way the measure has been used. Section 5 then addresses the obvious question of why the concept has been so widely deployed and Section 6 concludes.

EFFECTIVE PROTECTION IN POLICY APPRAISAL
Why, despite the criticisms by in?uential theorists, have a generation of applied trade economists (including the present authors) made such extensive use of the concept? Have these applications of effective protection and the interpretation of the resulting estimates been liable to the criticism summarised by Anderson (1998)? In what follows we argue that the extensive usage of effective protection estimates is not despite nor in disregard of the theoretical challenges. Rather the manner in which the empirical estimates have in general been used and interpreted to analyse trade policy, especially in a developing country context, has exploited the fundamental utility of the concept, and we will argue that there continue to be circumstances where it dominates its alternative, CGE modelling.

The Incidence and Relative Utilisation of Effective Protection Applications

The effective protection concept has been very widely used indeed. This is especially so for developing countries, where it has been applied probably more
widely than any other concept or measure of the incentive structure.3 Its tract- ability and relatively more parsimonious data demands that some other concepts and modelling frameworks (e.g. domestic resource cost analysis or CGE model- ling) no doubt account in part for both its considerable incidence and greater utilisation in developing countries. But the generally higher level of trade barriers in developing countries and greater impetus for unilateral trade policy reform in these countries is no doubt also a further contributory factor. Certainly there was an explosion of studies on developing countries following the major multi- country analyses of Krueger (1978) and Balassa (1982), and through to the major post-liberalisation appraisals of, for example, Papageorgiou et al. (1991).
The proliferation of applied general equilibrium modelling, aided by improved hardware/software capabilities and efforts to enhance the quantity and quality of data availability for social accounting matrix construction, has not however, eliminated interest in and application of effective protection analysis. Policy makers and analysts frequently remain interested in levels of product or process disaggregation well below those that are tractable even for sophisticated CGE models. Although the substantial reduction of tariff barriers in industrialised countries has reduced the need and scope for quantifying trade barriers in these countries, alternative incentives and pressures for detailed analysis of trade barriers have emerged. In the case of both the industrialised and developing countries there is a renewal of interest in the role of ‘natural’ barriers (e.g. international transport costs) in in?uencing relative incentives. While for the developing coun- tries trade policy changes are now being driven also by the explosion of regional and bilateral trade agreements. As a result, comprehensive estimates of effective protection continue to be reported, for example, in recent WTO Trade Policy Reviews; such as those for Bangladesh (2000) and Papua New Guinea (1999). Indeed for most developing countries the TPRs report as a minimum, the pattern of tariff escalation by stage of processing in each sector. It is more likely to be data availability or information on the technological characteristics of production or a lack of human resources to generate estimates that deters reporting of effect- ive rates, than the emergence of a set of applied trade economists anxious about the theoretical critique of the concept.

CONCLUSIONS
The development and re?nement of the effective protection concept has been one of Max Corden’s major achievements. As a new tool for trade policy ana- lysis it was quickly adopted, in part because it had a higher information content than nominal protection, in part because it helped analysts and policy makers to think more broadly about the economic effects of a given protective structure. But the concept has not been without its critics on the grounds that:
In general equilibrium, the usual definition corresponds to no economically interesting magni- tude (Anderson, 1998, p. 21).
That theoretical critique is a powerful one. Moreover, technology has marched on and some argue that since resource movements can be simulated directly in CGE models, measurement of effective protection by conventional means is now redundant. Interestingly, Anderson (1998) has recently sought to rehabilitate effective protection in a general equilibrium framework which can be made operational in a CGE framework.

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