Political Economy of Trade Policy- Theory and Evidence from Bangladesh

Abstract

Trade policy within Bangladesh has followed a course of gradual liberalization associated with tariff reduction and rationalization, and removal of protective quantitative restrictions. But the pace of liberalization has varied significantly over different periods depending on the state of the economy or the weight of influence of different actors. To capture this dynamics, in this article, we develop a simple decision theory model to understand how an incumbent government decides upon tariff rationalization strategies. In particular, the role of key stakeholders-consumers, exporters and import substituting industries-is considered, and the collective action issues faced by each group are examined to understand how incumbent governments will respond to their relative influence. Two principle inferences are drawn from this analysis. First, incumbent governments are more likely to facilitate tariff rationalization episodes in times of economic or political crisis. Second, if the economy is not in a state of crisis and consumers suffer from the acutest form of collective action problem, then one can expect that tariff rationalization momentum will be slow or non-existent as long as import substituting industries have equal or more policy clout than exporters. These inferences are then examined in the context of trade policy developments in Bangladesh.