The Political Economy of Trade Liberalization in Developing Countries: The Sri Lankan Case

Transcription

1 2003 U 842 The Political Economy of Trade Liberalization in Developing Countries: The Sri Lankan Case een wetenschappelijke proeve op het gebied van de Managementwetenschappen Proefschrift ter verkrijging van de graad van doctor aan de Katholieke Universiteit Nijmegen op gezag van de Rector Magnificus prof. dr. C. W. P. M. Blom volgens besluit van het College van Decanen in het openbaar te verdedigen op maandag 10 februari 2003 des namiddags om 3.30 uur precies door Murugesu Ganeshamoorthy geboren op 8 juli 1964 te Maho, Sri Lanka

2 CONTENTS vii Page Acknowledgement Contents List of Tables List of Figures List of Boxes Acronyms and Abbreviations v vii xii xiii xiii xiv PART ONE: INTRODUCTION 1 Chapter 1: The Political Economy of Trade Liberalization: An Introduction Introduction Trade Liberalization: Meaning and Definitions The Objectives of Trade Liberalization The Context of Trade Policies of Developing Countries Objective of the Study Contribution of the Thesis to Literature Methodology The Structure of the Thesis 17 PART TWO: THEORY AND POLICY 21 Chapter 2: Trade Liberalization: Theory and Policy Introduction A Theoretical Perspective on the Reasons for Trade Comparative Advantage Trade Theories [CATTs] Non-Comparative Advantage Trade Theories [NCATTs] CATTs and NCATTs: A Comparison 31 I. Inter-industry and Intra-industry Trade 31 II. Imperfect Competition and Scale Economies 32 [a] Scale Economies 32 [b] Oligopoly Reflections on CATTs versus NCATTs The Gains from International Trade Static and Dynamic Gains from Trade 35 I. Dynamic Gains from Inter-industry Exchange 36 II. Dynamic Gains Resulting from Intra-industry Trade The Relationship between [Free] Trade and Growth 38

3 viii 2.4 Should International Trade be Free? Reasons for Policy Intervention The Terms of Trade/ Optimal Tariff Argument The Infant Industry Argument The Increasing Returns Argument Other Arguments against Free Trade 46 I. Wage Differential Argument 46 II. Macroeconomic Disequilibrium Argument Restoring the Case for Free Trade? The Perspective of CATTs No Free Trade After All? The Perspective of NCATTs The Arguments Criticisms Is There a Case for Free Trade in Developing Countries? 54 I. Market Structure 56 II. Size of the Economy 57 III. Technological Character of Exports 58 IV. Gains from Trade Liberalization Summary and Conclusions 60 Chapter 3: History, Practice and Methods of Trade Liberalization in Developing Countries Introduction The Evolution of Trade Policies of Developing Countries The Historical Context of Economic Policy Evolution in Developing 63 Countries I. Ex-colonial Legacy 63 II. The Impact of the Great Depression 64 HI. Demonstration Effect of the Success of the Former Soviet 65 Union Inward-Oriented Trade Policies Weaknesses of Inward-Oriented Trade Policies A Shift in Thinking: Switching to Outward-Oriented Policies The Political Economy Reasons for Economic Policy Reforms The Determinants of Trade Liberalization: Internal Factors that Determine Economic Reforms: 82 I. Crisis Situations in the Economy 82 II. The Type of the Government: Authoritarian Regime or a Right Wing/Left Wing Government 84 HI. Regime Changes 85 IV. Timing and Sequencing 86 V. A Solid Political Base 87 VI. The Type of the Leadership: A Visionary Leader 87

4 3.4.2 External Factors that Determine Economic Reform: 89 I. Ideological Changes/ Demonstration Effects and Policy Advice 90 II. Influence of Multinational Financial Institutions [MFI] Summing Up the Discussion Summary and Conclusion 97 Chapter 4: Trade Liberalization and the Government Sector: A Survey Introduction Trade Liberalization and the Government Budget The Link between International Trade and the Government Sector The Effects of Trade Liberalization on the Government Budget Direct Implications of Trade Liberalization on the Government Budget Reform of Quantitative Restrictions Tariff Reforms 111 I. Reduction in Tariff Levels 112 II. Reduction in Tariff Dispersion 115 HI. Reduction in Tariff Exemptions and Tax Evasion 116 IV. Reduction in Export Taxes Indirect and Interactive Effects of Trade Liberalization on the Government Budget Changes in Import Composition and Economic Growth The Role of Domes tic Indirect Taxes in Trade Liberalization Should Revenue Concerns Really Matter? Some Empirical Evidence Summary and Conclusion 125 PART THREE: EMPIRICAL ANALYSIS 127 Chapter 5: Trade Policies in Sri Lanka since Independence: An Investigation Introduction The Sri Lankan Setting The Structure of the Economy at Independence Welfare State Trade Dependency Sri Lanka's Trade Policy: Political Regime Changes and Policy Reforms 141 Continuation of the Pre-independence Open Economy under the UNP Regime [ ] Introduction of Inward-Oriented Development Policies: Closing up the Economy under the SLFP Regime [ ] A Partial Opening of the Economy under the UNP Regime [ ] 151

5 5.6.1 Import Liberalization and Export Promotion Impediments to Liberalization in the period The Era of Closed Economy: Import Substitution Strategy under the ULF [SLFP-led coalition] Regime [ ] Major Policy Changes The Role of the State The Main Drive of Trade Liberalization under the UNP Regime [ ]: A Turning Point of Sri Lanka's Trade Policy Trade Policy Reforms since Export Promotion Open Economy with a Human Face under the [SLFP-led] Peoples Alliance [PA] Regime [ ] Trade Liberalization since Summary and Conclusion 171 Chapter 6: Trade Liberalization and the Government Sector: The Sri Lankan Case Introduction Sri Lanka's Fiscal Policy: An Overview Salient Features of die Fiscal Sector [ ] Fiscal Policy Orientation in the Post 1977 Period Custom Tariff Structure of Sri Lanka: Major Developments [ ] Tariff Changes During Tariff Reforms Since Sri Lanka's Government Revenue: Structure and Changes The Revenue Impact of Trade Liberalization: What does Sri Lanka's 195 Post-1977 Experience Reveal? 6.6 Summary and Conclusion 201 Chapter 7: The Political Economy of Trade Liberalization: The Sri Lankan Case Introduction Background to Economic Policy Making in Sri Lanka Internal Influences on Economic Policy Making A Crisis Situation Ideological Change/Regime Change A Solid Political Base The Type of the Leadership 221 I. The Presidency of Junius Richard Jayawardane 222 n. The Presidency of Ranasinghe Premadasa 227 HI. The Presidency of Chandrika Kumaratunga 233

6 7.3.5 The Type of Government 237 I. Introduction of a New Constitution with a Presidential System 237 H. The General Strike in July III. Stripping the Civic Rights of the Opposition Leader 241 IV. Referendum of 1982 for the Extension of the Term of Parliament Timing of Liberalization and Pressure-Group Activities External Influences on Economic Policy-making The Demonstration Effect/ Policy Advice From Abroad The Role of the Multinational Financial Institutions [MFIs] in Policy Reforms: The IMF and The World Bank Summary and Conclusion 267 PART FOUR: CONCLUSION 269 Chapter 8: Summary and Conclusion Introduction Reflections on Research Objectives and a Summary of the Thesis General Findings of the Research Internal Factors External Factors The Relative Importance of the Factors in Economic Liberalization Some Methodological Reflections, Dirctions for Further Research 285 Bibliography 287 Appendix 311 Nederlandse samenvatting [Summary in Dutch] 333 Curriculum Vitae 337