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Can trade policy help mobilize financial resources for economic development?

The linkages between trade and resource mobilization are complex and not well defined in theory. To what extent does trade policy affect resource mobilization and what are the mechanisms? We argue that trade policy is a key factor of influencing the domestic fundamental balance between aggregate savings and investment. The main effect of trade policy on resource mobilization stems from its contribution to static and dynamic gains from trade. But the effect of trade policy on the supply of financial resources also operates through several channels including through linkages of trade policy with foreign investment, government revenues, income distribution, foreign aid. The paper looks at direct and indirect channels, and makes a distinction between short and long term effects of different trade strategies. We also briefly review trade barriers in goods and services affecting developing countries and the potential gains from further liberalization. The long term gains from trade liberalization are substantial, but they may have to be set against short-term adjustments costs. The latter could and should be reduced by effective institutional and tax reforms.

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No: ERAD-2001-02

Authors:
Zdenek Drabek  — WTO
Sam Laird — UNCTAD

Manuscript date:  29 August 2001

Key Words  

Trade policy, finance, foreign investment, income distribution, aid.

JEL classification numbers  

F10; F13; O10; O16

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This is a working paper, and hence it represents research in progress. This paper represents the opinions of individual staff members or visiting scholars, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, not the official position of any staff members. Any errors are the fault of the authors. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Analysis Division, World Trade Organization, Rue de Lausanne 154, CH-1211 Genève 21, Switzerland. Please request papers by number and title

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