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Conditional Policies in General Equilibrium
Author(s) -
Krishna Kala
Publication year - 2015
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12191
Subject(s) - economics , subsidy , externality , capital (architecture) , general equilibrium theory , value (mathematics) , microeconomics , partial equilibrium , monetary economics , market economy , archaeology , machine learning , computer science , history
Obtaining lower generalized system of preferences ( GSP ) tariffs requires meeting costly R ules of O rigin ( ROOs ). Growing coffee in the shade is more costly, but yields a price premium. This paper analyzes the effects of such restrictions in a general equilibrium setting and shows that such policies may have unanticipated effects. It is shown that in a world with capital mobility, the GSP could result in capital outflows rather than inflows and consumer preferences for shade grown coffee end up hurting labor in developing countries. Even small subsidies that are contingent on the use of domestic intermediates can result in specialization in the targeted good. Value added contingent policies can easily lead to multiple equilibria despite the absence of externalities or market imperfections.