Project Design

Institutional Obstacles to Trade Liberalisation and its Benefits to SMEs, Iris/USAID 2002

    The history of economic development has been closely intertwined with that of a country's trade orientation. The fashion has ebbed and flowed regarding a more open economy, most recently in the guise of the virtues of globalization. Economists have extolled the (theoretical) justifications for freer trade and, currently, much movement is seen in the arena of WTO accession and the creation of regional, free-trade areas. Nevertheless, vocal criticisms remain, among them the unequal distribution of gains and losses as well as the likelihood of negative externalities to the commons (urban pressures, the environment, and natural resource depletion).

    Summary of results
    The authors take the view, based on a companion paper (Nugent 2002), that the disconnect between theory and outcome centers on inadequate attention to the institutional aspects of trade liberalization. Following the HPI (Harnessing the Power of Incentives) methodology developed for USAID in Zinnes and Bolaky (2002), they categorize these into three phases, prereform political will, reform implementation, and post-reform sectoral responses.

    They argue that unless the key obstacles impeding each of these three areas are addressed, the benefits of trade liberalization will be at best stunted and incomplete. This places into a new, positive light the policies of many countries hitherto viewed as simply protectionist or anti-trade. They see this result for trade reform as analogous to what Zinnes et al. (2001) found for "big-bang" privatization in the transition economies: a threshold level of institutional quality is required for the benefits of the reform.

    Using this orientation and following the HPI methodology, they take advantage of recent insights from the so called new institutional economics (Azfar 2002) to analyze six, key, institutional obstacles to the benefits of freer trade as identified by Nugent (2002) as having impacts and consequences for SMEs. Based on this analysis, they propose options for institutional reform and the associated initial conditions likely to be required in order for them to be effective.

    They then explore the role that USAID might play throughout its aid programming cycle to facilitate the identification and resolution of these institutional obstacles.

    The present paper also has a second purpose, namely, to illustrate how to apply the HPI framework to a USAID programmatic area, in this case trade liberalization, so as to identify concrete opportunities for institutional development assistance.

    Associated Activities and Documents
    Synthesis documents
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