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ALFRED
P.
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
EXPORT PROMOTION AS A DEVELOPMENT STRATEGY
By
Julio
WP#178i»-86
J.
Rotemberg-
May 1986
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
EXPORT PROMOTION AS A DEVELOPMENT STRATEGY
By
Jul io J.
Rotemberg"
WP#1 784-86
May I986
"Sloan School of Management, M. .T.
wish to thank Rudiger
Dornbusch, Paul Krugman and Garth Saloner for helpful
discussions.
I
I
EXPORT PROMOTION AS A DEVELOPMENT STRATEGY
ABSTRACT
This paper has two aims.
First it presents a model of the advantages
Second, it warns that in such a model, export
of promoting exports.
promotion may be of benefit only to a limited group of countries.
Encouraging others to become outwards oriented may be detrimental to
welfare.
The fact that, for the exporting sector to be viable, the
scale of the exporting sector must
be large relative to the optimal
scale of exporting firms
is advanced
as the motivation for export
promotion. 1 then argue that the scale of the exporting sector may, in
equilibrium,
be a signal of the export good's quality.
Large
capacities in the sector are required to convince importers to pay
high prices.
Such high capacities may effectively deter countries
capable of producing only low quality goods from subsidizing exports.
T
INTRODUCTION
two
has
paper
This
First
aims.
Second,
promoting exports.
advantages of
model, export promotion may be of
others
Encouraging
countries.
it
presents a model of the
warns
it
such a
that in
benefit only to a limited group
outwards
become
to
oriented
of
may be
detrimental to welfare.
It is
widely recognized (see Bhagwati (1978), Balassa (1980)
countries that have emphasized
instance) that less developed
better
terms
exports,
of
success
the
"The evidence
growth
economic
on import-
to rely
quite conclusive:
and employment than
He, and many
outward-oriented
such
of
is
exports
development strategies perfomed
import orientation".
countries with continued
view
have continued
outward-oriented
applying
in
who
Balassa (1980) says:
substitution.
countries
those
faster than
have grown
for
others,
economies as Korea and
Taiwan worth emulating and recommend that those nations who are
still
clinging to import substitution change their ways.
point out
important to
It is
outset that
at the
the policies
followed by the successful outwardly oriented nations has not been
the
dismantle
tariffs
of
edifice
erected
by
previous
to
policies.
Instead, they have added to this edifice various measures designed
promote exports.
have
been
the
paradoxical in
models,
terms
it
of
(1956)).
is
Thus,
source
weU known
and
of
is
the export promotion itself
their
new
the standard
light of
trade
it
riches.
2X2X2 trade
to
which must
This, in
models.
itself,
is
In these
that export biased growth tends to worsen the
can
even
lead
to a loss in welfare
(Bhagwati
Reliance on exports also leads to more exposure to the
risk
-3of protectionism.
In
been
has
there
fact,
Bhagwati (1978) stresses
advantages of export promotion.
The
in
may be
While this
Balassa et
when
in
second
following an
outwards oriented
have been
appear to
capital inflows
The
and industries.
to obtain
of the
Yet,
oriented strategy.
those
mask considerable variations
incentives across individual products
that capital inflows are easier
fewer
true, aggregate statistics like
(1982) undoubtely
al.
two ideas.
with export promotion policies have
first is that countries
distortions.
theorizing about the
formal
little
is
outwards
countries, foreign
important only
Korea.
in
Now,
Korea may well have a debt problem.
Section
export promotion.
profitable
that
is
paper
this
of
II
presents
rests on the notion that exports
It
when they are
carried out on a
There
optimal for a single firm.
in
effects of this
externality can be
should
subsidize
recommendation
exports.
given
Yet,
that
so
exporters more
used
must
many
countries
subsidies.
all
countries
suspicious of this
chosen
have
the same data
even after seeing
subsidize their exports
be
The
viable.
argue that
to
one
one
one
then an externality:
mitigated with export
principle be
could in
may only become
scale larger than the
is
makes other
exports
firms' increase
This model
a different rationale for
not to
as Bhagwati
(1978) and Balassa (1980).
I
think
chosen not
their
own
is
it
least plausible that those countries
to subsidize their
interest.
self
that for certain
relatively
at
large
determinants
of
exports
Thus
have done so
the model
countries, exports would
scale.
the
The
relatively
model
large
that have
in the pursuit
present has the
I
not be profitable
also
scale
seeks
to
of
feature
even
explain
in
the
that must be built up
-4-
export
before
become
industries
which exportts are ultimately succesfull.
may serve
installed in the export sector
Spence
the
of
(1973))
amount
obtain high
they would
quality
so large
is
goods
quality
countries that
would
Then,
at
of
Countries
mask
least temporarily,
However,
their products.
prices for
build
infer that
the good
countries capable
such
At
high
of
high
these equilibria,
unable to produce
themselves to be
is
producing
of
capacity.
there
export sector
level of capacity in the
that only
know
the exportable good.
of
importers to
required for
is
capacity
as a signal (in the sense
producers.
exist equilibria in which the
that
shows that the
capacity in the export sector to
of
good quality
themselves as
It
in those countries in
produce good quality products would be willing
intrinsically unable to
to subsidize a small
quality
even
viable
high quality
exportables abstain from promoting exports.
Starting
convince
all
at
these
equilibria,
information contained
in the
who can produce high
quality
output.
it
Alternatively
developed
to the
This not only
goods but also, by
from
other
which
high capacity
efficiently.
Then
is
forcing
This argument
IV closes the paper with a
to
promote
those
countries
that
is
is
caveat
exports only
exporters to be worse
export industry
to
this
off.
It
technically similar to the one in section
in the
only
for their
They must do
countries.
encouraging countries
presents a model which
lead countries
these countries worse off by
Section
in Section III.
may
leads
eliminating the
goods to receive lower prices
makes
themselves
argument that
installed capacity,
leads countries that are high quality
in
well be ill-advised to
export industry more.
to subsidize their
differentiate
may
nations to subsidize their exports.
countries to produce inappropiate
them
it
needed
to
II
export
find the necessary
-5-
export sector very
subsidies to the
Transfers
export promotion.
promote
they
do
exports
from
distortionary will abstain
such countries with the condition that
to
hurt
not
other
exporting nations
in the
absence of terms of trade effects.
THE MODEL: EQUILIBRIUM EXPORT PROMOTION
II
consider one good, say
I
A
from country
consumers
in
to
if
country B.
trade effects that
In
the
Thus,
period
observing installed capacity.
the good
is
of
Install,
capable
in
This
of
will
To ensure
simplest
I
assume
only
producing
later be
country B know
,
if
pay P
is
it
TV
for
pay
willing to
ignore the deleterious terms
I
bring about.
quality
at least
equilibrium, a
In the second period,
K
to
They are
is
of
There are two
observable
not
the capacity
if
K
initially that
;
by the
capacity of
shown
to
instaUed in the
K
quality
at least
it
must be such
goods
K
is
of
that
(h-countries)
while others do
be true for certain
having already experienced the
values of
K
.
good, customers
its quality.
that collective action
must assume that
way
high
consumers infer
otherwise they infer
For this to be the case, the level
low quality.
countries
I
good quality
producing country equals
of
pay more for the good
to
export promotion can
first
two qualities,
be of
However, they can make inferences on the good's quality by
customers.
in
good can
This
Country B's customers are wUling
for low quality sets.
periods.
potentially exportable
is
they are known to be of high quality.
only P
not.
which
sets,
country B are willing
of high quality.
sets
TV
it
is
is
needed
to achieve a
costly for firms to
of modelling this is to
capacity
grow large.
The
assume that capacities above some
level k'" are prohibitively costly while
k
smaller than
is
thus
1
.
which enables them
to a technology
assume that n firms have access
K
to
build a capacity of k at costs given by:
k < k"™
ck
k
that
it
n
these
of
quality country and of
TF^
K
=
-
(P^
c
+
K^
if
ti
it
is
in a
if
it
built a
capacity
both periods
but
whether
now consider
choose to produce for
the firm
a high
is in
low quality one:
k <
Rr^)k
in
I
individuaUy,
of
necessary to ensure
is
Having
.
in either.
Doing so would yield profits
export.
Kh
exceed
produce k units
would,
firms
m
produce
k units
cannot produce more than
any
nk
these firms can costlessly
of k,
nk'" >
,
(1)
socially possible to
is
K^
> k""
condition that
where the
k"" <
,
k"™
(2)
TT^
=
(p^
-
where R
Thus, high
is
Either, the
k < k""
the
high quality
as their
It is
h
it
I
future must
r
.
is
.
a price
becomes known.
it
)
must
point out that for
one
be heavily
prices are nor enough to induce
i
between
p
,
somewhat higher
a fortiori)
consider,
slow in learning from those
h
1
(and
important to
case
and
do receive
quality firms
be needed
nonzero k.
which
RpV
a discount factor
is
second period
action to
c +
of
it
1
J
and
p
.
the
prices in
For collective
be negative
to
h
be
for
negative,
two conditions must hold.
discounted so
that future
high
firms to invest or customers must
that have experienced the good
be
that good
-7-
quality
being produced
is
so that r
single producer installs some
buyers pay
and thus leads
little
be
will
case,
In this
.
capacity that capacity
good quality
buyers that
to convince
low
is
when
insufficient
is
produced.
This makes
producers.
to losses for
k
Consider instead the profits to a firm that has a capacity of
while other firms, together, have
W
are
if
,,h
W
,h
=
a capacity of (K -k
W
located in an h- country and
is
it
(p
-
c
a
Its
).
profits
otherwise:
^„h,,m
Rp )k
+
(3)
W
=
(p
Note
c
-
even
that
goods
quality
Rp
+
)k
firms
(1- countries)
it
W
is
is
get
Unless
installed capacity is large.
good
located
never socially beneficial.
never
+Rp
p
W
positive,
is
)
firms must
export.
is
alone,
W
negative and
TT
it
Q
.
sufficient capacity
1
c
by
start the analysis
positive there are two equilibria
little
For
which again requires
The
first
has
and
make
losses.
Then, each firm has an incentive
is
positive
available to ensure high prices.
if
all
no production for
optimal to invest in capacity because,
be paid
will
production of
it
is
in h-countries.
invest simultaneously.
No firm finds
W
produce the good.
must equal or exceed
studying the incentives to invest
With
when
period
production of the
unless
Similarly,
that the future be significantly discounted.
that produce low
in the first
paid
of 1-countries to
in the interest
to be positive (p
countries
in
if
it
The second has
to invest
The
because
presence
of these two equilibria is akin to the multiplicity of equilibria that
arise
in
the
context
of
adopting
superior telephone systems (see
-8-
Rohlfs
There
(1974)).
too,
adoption
system by others makes
of a
adoption more attractive.
Another possibility, considered
adoption decisions
that the
is
the adoption
sequentiaUy but
are made
n
This requires that there first exist
occurs simultaneously.
Itself
FarreU and Saloner (1985a)
in
decision periods in which firms decide whether to invest or not. After
this
round
Then
of
periods
over,
is
the unique equilibrium
all
invest simultaneously.
the firms
when W
positive
is
is
for firms to invest
since they can always expect the last firm to decide to invest
if
all
the previous firms have decided to do so.
Yet, a more natural dynamic setup in the context considered
is
invest early earn
even when other firms
at first
ti
case no firm wiU want to invest early and
only
equilibrium
producing for
be
to
Then,
and invest sequentially.
that firms both decide
one
the
which
in
me
This leads
export.
In this
follow.
all
firms refrain from
assume that
to
firms that
natural to expect the
is
it
here
in the
model
presented here the equilibrium with no investment wUl prevail when
it
exists.
government
The
can
encouraging firms to invest
way
if
proposed
eliminate
first
K
/k
is
good.
This
and
Spatt
(1983)
by
Dybvig
Once
requisite capacity
the
if
firms are promised
W
price
positive.
is
will
unless the government
is
essentially the
,
by
principle, one
be
solution
the problem of adoption
they wiU
invest in the
Moreover, once they
automatically
would, in principle, incurr no cost.
In
firms that they wUl
for
p
equilibrium
this
the export sector.
they export the
externalities.
capacity,
in
promise the
of doing so is to
paid p^
easily
equal p
so the
invest in
government
This policy has the danger that,
very precise as
to the
nature of the good for
:
-9-
which
it
ensures
take advantage
goods to
hand,
a price of
p
produce shoddy and
On
government's program.
of the
government
precise
may
firms
,
dictated
may
specifications
cheap
the other
lead
to
Inappropiate product designs.
An
is
remedy which would appear
alternative
and/or production of the export industry.
to subsidize the capacity
Indeed,
subsidization
credit
of
exporting industries and other
to
rebates are widely used policy
export subsidies such as tax
outward oriented economies such as Korea
the
government
does
be much more flexible
to
as
not,
3
The question
.
is
There are
susbsidy contingent on the export drive being unsuccesfull.
two related
reasons for
government that
is
if,
first
is
unsuccesfull are probably not credible.
as
needed
are deadweight
below, there
governments'
interest
to
unsuccesfull.
The
second
specify what
instance
pay
means for an
it
would be necessary
it
variations
demand
in
By
perfomance.
or
comparison,
This
Its
if
susbsidy
the
reason
that
is
export drive to
it
if
is
not be
the
it
is
would
in the
drive
relatively easy to
to
For
be unsuccesfull.
affect
is
somewhat hard
to consider the possibility that
supply
true
with the taxes
will
it
,
the
export drive
particularly
is
costs associated
Then, ex post
to finance the subsidy.
promises by
that
subsidize an industry only
will
it
The
this.
why
still
and Spatt (1983) make the
Dybvig
in
tools in
random
measured
export
give subsidies
contingent on certain export capacity being installed.
For
the
model
capacity constructed
for export
s
=
where
c
-
p
s
-
considered
is
here,
a
subsidy
of s
per unit of
necessary to induce any single firm to produce
equals
Rr
(4)
10-
single producer
subsidy a
With this
subsidy induces many firms to enter, industry capacity
receive a price of
so that firms will
[p^(l
=
in
^
R)
c
-
shjk'" = [p^
.
establishing
W
limited time only.
by
given
to
which
in
the industry
is
specific industries for a
costs of
the social
The
sources of this distortion.
must be
larger value for S which
raises d.
Under
increasing
but
raised to
objective of
so that
must verify
is
Second,
built.
subsidy.
the function
Thus,
administration
d
is
not only
For instance, suppose the government
keeping deadweight
losses low.
each successive doUar of taxation
Then, the deadweight loss from
progressively bigger
of
are two obvious
requires more taxes and more
convex.
with the
social costs
government
finance the
reasonable assumptions
also
The
resources must be spent
that capacity for legitimate exportable production
distortionary taxes
I
the benefits to the
There
d(S).
first is that
However,
S as well as the cost
In particular the
administering the subsidy.
if
the subsidy.
by the subsidy
the distortions induced
the industry.
subsidy
include the total expenditures on subsidies
chooses taxes
(5)
Note that the subsidy
.
benefits
(4)
offer this
nations only
industry exceed
r*^)]k'"
-
4
subsidy
assume that
subsidies
giving
of
period
the
R(p^
^
This accords well with the Japanese and
its credibility.
practice
The
during
given
be
only
Korean
K
exceed
Thus the
both periods.
p^
-
so that profits net of subsidies equal
need
will
this
firms will earn rents equal to N:
subsidized
N
p
Since
breaks even.
d
is
convex.
Similarly,
if
is
there are
-11-
diseconomies os scale
administering a subsidy program (because, for
in
fraud becomes
incentive for
Instance, the
The
larger) d becomes convex.
by ns k
either be given
if
is
it
granted
of
K
it
may be more
assume only that the
1
The
.
=
beneficial so
is
that local
theoreticaUy
B
subsidy S
,
that
firms
more
is
an increasing function
W
so
that the
equal:
export
concentrate on
I
K
s
(6)
positive,
is
can
implement in practice.
d(S^(K^))
-
B
Unless
ensure
firm net of subsidy equal
profits of each
nW^
to
difficult to
total
social benefits of the subsidy,
B^
granted to aU the firms or by
is
This second alternative
.
attractive although
it
is
subsidy for an h-country, S
total
enough firms
only to
receive the price p
Thus
if
the program
larger as
promotion
the case
in
is
never
which
nW
socially
exceeds
d(S^(K^)).
now turn
I
low quality goods.
a
incentives faced by the country
to the
wUling to export equals
s^
= c
-
p^(l
+
which exceeds
the
1-
can ensure production for export by giving
It too,
However,
subsidy.
R)
s
.
the
s
=
that produces
subsidy
that
makes individual producers
:
s^
+
R(p^
The net
-
p^
benefits of susbsidizing
(7)
exports
country are given by:
B^ = nW^
-
d(s\K^)).
(8)
in
-12-
on subsidies
the expenditure
where s\
K
increasing in the capacity that must be susbsidized
Second,
than W^.
S^
S^
exceeds
d(s\K*^))
that
so
s^
additional unit that
is
exceeds
and the function d
s
Figure
in
types of countries are shown
K
export industry started.
the figure, there
is
a range for
then, for
true for
In figure
1
which promotion
all
positive
there
is
is
smaller
If
reduces B
K
K
if
above
W
is
both
as in
which
in
even
export promotion
K',
more
of
positive,
is
.
the reasonable
the subsidy
W
More
)).
convex, each
(between zero and K')
K
it
in
at
is,
quality goods.
negative.
always a level
of
K
and K"
between K'
below
This however, requires that K' be
Otherwise, the maximum feasible value of
K
makes
it
in
quality
optimal for the country that produces high
goods but not for the other.
nk"*.
it
under
countries that produce high
most, socially optimal in
is
is
subsidize the export industry
appears socially beneficial to
Even
K
requires
units to get the
level of
is
more than
as functions of
a higher
This
W
There, the benefits for
1.
assumption that
the 1-country.
First,
benefits
bigger than d(S (K
is
subsidized reduces B
shown graphically
is
The
.
be
to
both countries subsidize the same number of units
if
importantly, since,
This
for two reasons.
h-country B^ exceed B
to the
assumed
again
is
worthwhile
for the l-country to promote exports.
I
now come
produced
on
the
in
to the rationale for
countries whose capacity exceeds
inability
quality of
information
of
goods from
is
purchasing
the
particulaly
promptness
countries
newly industrializing
broadly to include not only
also
paying a high price only
with
compelling
when
K
.
to
delivery
goods
This rationale rests
know much about the
nations.
Such lack
of
one interprets quality
the reliability of the final
which
to
will
take
product but
place,
the
-13flexibility of the suppliers
etc.
to
much other
absence of
In the
accomodate changes
information about
weU become
level of installed capacity might
desired design
In
a useful barometer.
particular, in the model presented thus far, as long as
only governments of h-countries find
industry.
Therefore,
quality of the goods that their
national interest, a
from
the
level of
h-countries.
forthcoming
can
K
this
above K'
is
are
export
both informed about the
countries can produce and act in
above K' separates
Governments
signal
K^
(as
the
In
optimal to promote the
it
governments
if
quality,
know
that
the
the 1-countries
good
quality
is
Spence (1973)) by subsidizing
in
capacity and customers can thus be assured that only h-countries
have
the requisite capacity.
This leads to two questions.
First,
reasonable
is it
to
assume
that governments are relatively well informed about the quality of
the
goods producible
in their countries?
Second, can one expect
act in the self interest of their country?
important and
extremely difficult
open for future research.
pointed out that
and
education of
since
the
government
more
their population
is
about
a
the
which
to the first question
governments certainly know
skills
substantially
empirical question
answer
In
This second question
employer
large
motivation
and
an
be
level of
Also,
probably
aspiration
to
left
must
it
outsiders.
it
is
is
more about the
than do
them
of
knows
its
country's workers than do foreigners.
Note
that,
while
the
model
has
been
constructed
under the
assumption that governments are certain whether their industries
produce high or
low quality, this
results would obtain
the probability
if
is
inessential.
Indeed, the same
governments were simply better informed
of being
high quality
exporters.
will
about
Some governments
-14-
would have to know this probability
to
be high while others would have
Then, governments who estimate
to
know
to
be high would be willing to subsidize larger capacities.
it
to be low.
now
I
turn
to
equilibrium values of
K
.
,
K
discussion
formal
any value
First,
of
However, as
1-countries from h-countries.
nk
more
slightly
a
K
long as K"
K
that,
is
the
of
above K'
separates
lower than
Vi
barely exceeding K'
the most natural equilibrium
is
involves the smallest deadweight loss from subsidies.
of
this probability
since
Second,
values
below K' do not constitute equilibria in this model in the sense
if
K
are not willing to pay p
below K', importers
is
for
units exported by countries with installed capacity equal to at
K
.
it
This
K
occurs because for
would also subsidize exports
only equilibria
if
many "pooling"
K' exceeds
nk
countries and the 1-countries
by countries with
p
m
=
ap
h
,
+
where a
is
population
is
a'.
a'
if:
,
,
1
which
is
K
given by:
is
the
the h-
that both get the
the same so
of
same
received only
.1
(l-a)p
the proportion of countries that actuaUy supply
that the
Then, even
for a country to receive p
only equal
indeed these are
equilibria;
installed capacity of at least
Suppose
quality goods.
which promote the separation
This price p
in the first period.
price p
K
At these, the capacity of
.
is
governments of 1-countries
below K'
In addition to these values of
countries there are
least
were paid for these exports.
p
if
all
proportion of
when
h-countries in
the minimum
in the first period,
K
high
the
capacity requirement
,
is
zero,
a
will
-15W'^ =
(a'p^
-
(1
+
words,
In other
their proportion
a'
all
small
is
R)p^
+
1-
-
c)
> 0.
enough
that,
or equal to R, the condition that
Then,
participate,
will
exceed
export
ti
However,
such
be
will
exporting and
if
a'
all
if
participate,
less
is
than
be negative contradicts condition
numerous
participation unprofitable.
the proportion
In particular,
a'.
participate
even when they
l-countries are sufficiently
they make
choose to
countries will
they receive a sufficiently high price.
(9).
(9)
that,
if
they
all
In this case,
a
of l-countries that
l-countries are just indifferent between
that
abstaining from
This implies
exporting.
that a must
equal:
[c-(l+R)pV[p^-p^]
K
Note that, as
export
must
important
separating
raises
exporting and
indifferent between
has
implications.
equilibrium
(with
This
pooling equilibria.
between the two.
is
K
proportion of h-countries
and
thus
not exporting.
particular,
equal
it
keeps
that
l-countries
This Indifference
means
that
the
Pareto dominates the
to K')
Therefore, Pareto superiority requires only that
for h-countries to do so
For a
In
p
(10)
so because importers are also indifferent
countries prefer the separating
nk'"(p^-p"^)
d(s\K"'))/[nk"'(p^-p^].
increases, the
This
rise.
+
=
equilibrium.
sufficient
condition
5
is
:
nk'"(p^-pS(l-a)
given by
A
(10) the
left
>
d(S^(K'))
hand
-
side of
d(S^(K'")).
this inequality is
h-
.
-16-
equal
to:
nW^
-
dCS^K"")).
inequality can be rewritten as:
Thus the
nW^
K
'
-
d(S^(K'))
is
> dCS^'CK"'))
turn, exceeds d(S
d(S^(K') which, in
On
given K*", the right hand side of (11)
separating equilibrium
Ill
is
nonpositive.
is
producers for a
Therefore,
Pareto superior for sufficiently low
succesfull,
with
become
has
it
export
promotion
policies
commonplace
a'
become
having
extoll
to
When these praises
outwards orientation.
presumably
accompanied
come
become outwards oriented
7
.
are sung by
international
simplicity of
I
start
1
consequences
study the
which wiU be assumed
exposition
g
subsidies to countries that
this section
In
of these policy oriented transfers
For
with
so
virtues of
the
organizations with the capacity for extensive discretionary funding
to T.
the
FORCED EXPORT PROMOTION
Countries
they
of
countries must provide a
1-
response by their
obtain the same
larger subsidy to
equal
hand side
so the left
(K'))
the other hand, since
(11)
which makes nW
level of capacity
defined as the
(11) is positive.
d(S^K'"))
-
to
be equal
by analyzing transfers
received exclusively by 1-countries.
These transfers
between the cases
in
shift the
which the
B
B
line
'
up by T.
line
We must
meets the x-axis to
distinguish
the left
.
-17of both
and K" and
nk
case there
B
'
is
meets
line
countries
find
countries
wUl
Instead,
1-
the
then
continue
who receive
p
transfers wUl
when
true as long as the transfer
to certain units at
of
receive only
as
is
l-country
case
twofold.
there
First
all
is
the
This
inefficiency
is
is
exactly
from
the deadweight loss
is
no
level
in
capacity
of
order
.
Thus
that
Then, unless a
devised the only equilibria
exporters are paid p
p
is
which equals -n with k
form considered
of the
strictly smaller than
is
units
their export industry more
there
different signalling mechanism
equilibria
This
the worldwide
distinguishes countries with good quality from others.
pooling equilibria
the
in
from 1-countries.
to distinguish themselves
second
national
may now be
In this case
Second there
forcing h- countries to subsidize
the
is
units subsidized.
transfer T.
equal to the
in the
p as
allows the country to give a subsidy of
national cost.
producing
the total
equal to
T
Those
.
negative for positive k.
promoting policies
loss from export
inefficiency
no
is
it
K
their products.
for
much capacity
subsidize only as
national interest even
In
capacity of
a
receive
to
the
At this equilibrium only h-
subsidize
to
the point at which
between
K"
In the first
doesn't.
it
Note, however, that selling goods for p
interest.
s
and
x-axis
optimal
it
countries
long as they
K
equilibrium with
an
which
the case in
will
be
At these pooling
above.
in the first period
where p
h- countries are strictly
worse
is
off.
Moreover, as shown above these pooling equilibria are Pareto dominated
by the separating equilibrium
countries.
Then, even
if
if
there are a sufficient number
they receive a transfer
countries are indifferent between
T
of
1-
for exporting,
exporting and not exporting.
1-
Thus
worldwide losses equal the entire transfers to 1-countries in addition
-18to the losses to h-countries.
So far
considered only
have
I
transfers
Obviously
countries.
then
the case in which the
the
K
if
B
'
equilibrium
above K'.
Also,
is
K
possible.
chosen below K"
is
above
K"
only
which
h-
and
if
it
can
So, again,
in
both K"
and
at the cost of
possibility that arises
there will be
it
that the
Then
instead
If,
K
is
receiving the transfer will
So while raising
ensuring that only h-countries invest
is
left of nk"*.
pooling.
h-countries
Invest while the others will not.
lines
meets the x-axis to the right of nk
The new
the
only
1-countries
and B
maintained
be
1-
separating
the
left of
meets the x-axis to the right of K" but to the
chosen
of
on
effect
meets the x-axis to the
separating
only pooling
B^'
no
and h- countries that receive the transfers.
1-
raising
have
This respectively shifts the B
receive transfers of T.
nk"'
both
Suppose then that some h-countries and some
equilibrium.
of the
by
received
are
in
realistic case
does not apply when transfers are given
it
they
h-countries;
to
promotion
export
for
more
over to the
analysis, however, carries
The
1-countries.
transfers to
K
has the ability
now has the
side effect of
shutting out of the export market other h-countries.
IV
A CAVEAT: EXTERNAL ECONOMIES
Up
to
subsidies
destroy
to
a
considerably
section
I
point
the
message
countries
that
engage
this
want
relatively
good
worse
without
to
off
even
to the
one
in
is
has been that
paper
export
in
and
equilibrium
emphasize that this
a very similar model
this
of
promotion may well
make
h-countries
helping 1-countries.
only a possibility.
section
II
can be
In this
Indeed,
constructed in
-19-
which transfers for export promotion
occurrs
K
if
are not that destructive.
instead of being a variable used to signal
is
This
a level of
capacity which simplifies the operation of the export sector.
Suppose
once
while,
companies find
the
the export sector
costs.
On
export
sector
easier to arrange
it
are wUling to pay p
If
export sector
the
if
than
smaller
is
K
export because exports must be arranged on an
difficult to
basis
that,
for
the other hand,
trading
Thus,
exports.
while consumers
goods, exporting firms receive only
all
so that p
small,
is
individual
sufficiently big,
is
is
it
,
-p
spent on
is
p
transactions
once the export sector attains a
K
size
,
this transactions cost disappears.
Therefore, in
all
countries,
profits to a single
exporting firm
are given by:
TT*^
=
(p\l+R)-c)k'"
which
is
capacity of
K
assumed
has been established
Then, countries
to be positive.
to subsidize exports
B*^ =
nW^
where S
-
is
Now suppose
state,
B
dCSCK*^))
will find
it
W
which
in their best
once
a
assumed
is
interest
>
the total subsidy
needed
differ in
the distortions
positive
while
possibly due
for
others
K
to obtain a capacity of
to the
it
is
.
caused by the
Then, for some countries, those who start from
few distortions
is
are given by
to a firm
if:
that countries
same subsidies.
system with
be negative whUe profits
to
lack of
negative.
a
tax
a welfare
In
-20-
equilibrium, only the former
Now
a transfer
T
subsidize exports and therefore
export.
from the rest of the world to countries unwilling
export otherwise has
a social cost
of only
T
if
the transfer
to
makes
countries just indifferent between exporting and not exporting.
true in the model of Klein and Leffler (1981) in which
information about the good's actual quality spreads very quickly and the
Then firms capable of producing both the
future is relatively undiscounted.
prefer to produce the high quality good if
might
low and the high quality good
stream
of rents associated with high quality
the
the price is high enough that
It must
of low quality production.
benefits
period
production exceeds the one
high
ensuring
method
of
Leffler
and
(1981)
be pointed out that the Klein
quality production, namely to permit the price to be quite high, does not work
lere since some firms are only capable of producing low quality and wiU thus
sell low quality goods in the first period even when the price is high.
2The possibility of this "excess inertia" is shown in FarreU and Saloner
(1985b).
a discussion of Korean policies.
216
for
3See Balassa (1982) p.
4See Balassa (1982), p. 216 for example.
5This condition is only sufficient because we are neglecting the possible
These would
benefits in the second period from the separating equilibrium.
quality of
good
the
about
information
equilibrium,
accrue if, in the pooling
is
period
that
price
in
so^that
the
imperfectly
transmitted
goods is only
IThe opposite
is
below p
.
6See for instance IMF (1985) p. 12-13 and Clausen (1986) plO-^^
TIndeed The Economist 3/22/86 reports that World Bank "policy loans" i.e.
loans whose purpose is not to fund specific projects but to facilitate the
changing of economic policies, didn't exist in 1979 but accounted for 15-17%
of new lending in 1985.
21-
K^
Figure
1
Net social benefit as a fonction
of K
the minuTTLim capacity needed to
receive P' in the first period
,
,
-22-
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Bela
A. The Process of Industrial Development and
Balassa,
International Finance
Alternative Development Strategies
Section,
Princeton University, Princeton, 1980.
:
,
A.
et
al:
Balassa,
Bela
Development Strategies in Semi
Industrialized Economies Johns Hopkins Press, Baltimore, 1982.
,
Jagdish
Bhagwati,
N. "Immiserizing
Note". Review of Economic Studies June 1956.
:
Growth:
A
Geometrical
.
Anatomy and Consequences of Exchange Rate Control
Cambridge, 1978.
:
Regimes
.
Ballinger,
Economic Growth, the Path to the Alleviation of
Clausen,
A.W.:
Debt and Poverty The World Bank, Washington, 1986.
.
Dybvig, Philip H. and Chester Spatt: "Adoption Externalities as
Public Goods" Journal of Public Economics 20, 1983, 231-48.
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Farrell,
Compatibility
1985a, 70-83.
Joseph
and
and Innovation"
Garth
Saloner
Rand Journal
:
"Standartization,
of Economics
,
16,
Spring
"Installed Base and Compatibility, with Implications for
Product Preannouncements", mimeo, July 1985b.
:
International
Monetary
Washington, AprU 1985.
in
Fund:
World Economic Outlook IMF
,
Klein, Benjamin and Keith B. Leffler: "The Role of Market Forces
Assuring Contractual Perfomance", Journal of Political Economy 89,
,
August
1981,
615-41.
Rohlfs,
J.:
Communications
Science
,
5,
1974,
"A
Theory
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Bell Journal of Economics and Management
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Spence, Michael:
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Lib-26-67
3
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