The Political Economy of Protectionism and Industrial Policy

This paper develops a model of joint determination of trade and industrial policies where the politicians in charge of the government can direct the rents generated by their policies toward their political or economic objectives through different channels. It shows that taking account of the value of all rents that can be controlled by the politicians - including tariffs and non-tariff barrier premia - and endogenising specific asset formation can help explain a host of empirical regularities, while also offering new hypotheses to be tested. Under reasonable conditions, these features induce positive relationships between the restrictiveness of policies toward domestic and foreign competition and the import penetration ratio, the output per unit of industry assets, the inverse of the industry's productivity relative to its foreign competitors, and the inverse of the price elasticity of the domestic demand for the industry's product. The model also offers a guide for empirical research on the role of factors that shape the effectiveness of lobbying and other rent appropriation mechanisms in policymaking.

  • Authors: Hadi Salehi Esfahani & Munir Mahmud
  • Year: 2000
  • Organisation: University of Illinois
  • Publisher: SSRN
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