How Does Trade Openness Influence Budget Deficits in Developing Countries?

This paper analyzes the effects of trade openness on budget balances by distinguishing the effects of natural openness from those of trade-policy induced openness. Using the GMMsystem estimator, the econometric analysis focuses on 66 developing countries during 1974-98. The results show that trade openness increases a country's exposure to external shocks regardless of its underlying causes. This reinforces the adverse effects of terms of trade instability on budget balances. However, trade openness also influences budget balances through several other channels: corruption, income inequalities, etc. The paper shows that these additional effects of natural openness and trade-policy induced openness on budget balances go in opposite directions: the former deteriorates budget balances whereas the latter improves them.

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Year of publication:	2006-01-01
Authors:	Combes, Jean-Louis ; Saadi-Sedik, Tahsin
Institutions:	International Monetary Fund (IMF)
Subject:	Trade policy \| Developing countries \| Budget deficits \| Terms of trade \| trade openness \| budget balances \| government revenue \| external shocks \| public spending \| trade shocks \| tax base \| fiscal policy \| fiscal policies \| political economy \| trade liberalization \| trade policy instruments \| fiscal performance \| fiscal deficits \| trade policies \| public finances \| measure of trade \| impact of trade \| terms of trade shocks \| budget deficit \| fiscal administrations \| international trade \| budget balance \| government budget \| reducing tariffs \| foreign capital \| trade restrictions \| government spending \| budget surplus \| tax rates \| capital expenditures \| fiscal theories \| impact of trade liberalization \| value of exports \| trade regimes \| free-rider problem \| liberal trade policy \| global integration \| public finance \| trade taxes \| commodity prices \| fiscal revenues \| public debt \| export taxes \| fiscal affairs \| exchange rate regime \| exchange rate regimes \| liberal trade \| income distribution \| fiscal systems \| fiscal deficit \| reduction in tariffs \| budget position \| trade barriers \| fiscal effort \| nontariff barriers \| open economies \| fiscal affairs department \| interest groups \| rural population \| fiscal surplus \| government budgets

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Extent:	application/pdf
Series:	IMF Working Papers.
Type of publication:	Book / Working Paper
Language:	English
Notes:	The text is part of a series IMF Working Papers Number 06/3 2 pages long
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005768955