Globalisation in Developing Countries : The Role of Transaction Costs in Explaining Economic Performance in India

The quest for large numbers has been going on for some time in international trade economics: models of trade liberalisation have consistently produced results that, compared ex post with real world data, show the right sign but the “wrong” magnitudes. This paper proposes a new approach by considering transaction costs reductions as an important factor explaining developing countries’ actual performances. Rather than presenting econometric estimates of transaction costs from reduced form equations, this study explicitly introduces transaction costs in a system of structural form equations to build a general equilibrium simulation model. A clear mapping of the analytical channels through which changes of transaction costs affect the economic results is thus a primary objective. Additionally to the effect on aggregate income, the large number issue, this paper examines how transaction costs influence income distribution. Numerical simulations based on India are presented ...