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By Walter Kennes (auth.)

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Additional info for Small Developing Countries and Global Markets: Competing in the Big League

Example text

Consider the case of a market of a single product in a small country. The item is not produced in the country. Protection, in the form of tariffs, is generally paid for by consumers through higher prices, while the government receives the tariff revenue. 1, based on Corden (1974), the world market price is at level OC. The small country can import whatever quantity it wishes at that price. It is further assumed that the exchange rate is in equilibrium so that the import price can be considered to reflect the true social cost of imports.

Sachs and Warner (1995) made a detailed and influential analysis of the relationship between openness and growth. This study is particularly interesting for the way in which the problem of measuring openness is dealt with as well as for the detailed documentation of the data. Openness is measured by the absence of one or more of five conditions: • non-tariff barriers covering at least 40 per cent of trade; • average tariff rates of 40 per cent or more; • an official exchange rate that is overvalued by at least 20 per cent on average relative to the black-market exchange rate; • a socialist economic system; • a state monopoly on major exports.

1, based on Corden (1974), the world market price is at level OC. The small country can import whatever quantity it wishes at that price. It is further assumed that the exchange rate is in equilibrium so that the import price can be considered to reflect the true social cost of imports. Without a tariff, demand curve D would lead to an imported quantity of CF. If the price rises by the tariff value AC, the import quantity decreases to AB. The government receives tariff revenue represented by the rectangle a.

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