'World Bank Reprint Series: Number 317 Jan Peter Wogart and Jose Silverio Marques trade Liberal aon, and Inlflaticon A Methodological Exploration Applied to Argentina Reprinted with permission from Weltwirtschaftliches Archiv, vol. 120, no. 1 (1984), pp. 18-39. World Bank Reprints No. 276. Sweder van Wijnbergen, 'Interest Rate Management in LDCs," Journal of Monetary Economics No. 277. Oli Havrylyshyn and Iradj Alikhani, "Is There Cause for Export Optmism? An Inquiry into the Existence of a Second Generation of Successful Exporters," Weltwirtschaftliches Archiv No. 278. Oli Havrylyshyn and Martin Wolf, "Recent Trends in Trade among Developing Countries," European Economic Review No. 279. Nancy Birdsall, "Fertility and Economic Change in Eighteenth and Nineteenth Century Europe: A Comrnent," Population and Development Review No. 280Q Walter Schaefer-Kehnert and John D. 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Miqueu, "Short-run Rigidities and Long-run Adjustments in a Computable General Equilibrium Model of Income Distribution and Development," Journal of Development Economics No. 2,7. Michael A. Cohen, "The Challenge of Replicability: Toward a New Paradigm for Urban Shelter in Developing Countries," Regional Development Dialogue No. 288. Hollis B. Chenery, "Interaction between Theory and Observation in Development," WVrd Development No. 289. J. B. Knight and R. H. Sabot, "Educational Expansion and the KLtznets Effect," The American Economic Review No. 290. Malcolm D. Bale and Ulrich Koester, "Maginot Line of Eurdpean Farm Policies," The World Economy No. 291. Danny M. Leipziger, "Lending versus Giving: The Economics of Foreign Assistance," Vkrld Development No. 292. Gregory K. Ingram, "Land in Perspective: Its Role in the Structure of Cities," World Congress on Land Policy, 1980 No. 293. Rakesh Mohan and Rodrigo Villamizar, "The Evolution of Land Values in the Context of Rapid Urban Growth: A Case Study of Bogota and Call, Colombia," World Congress on Land Policy, 1980 No. 294. Barend A. de Vries, 'Intemational Ramifications of the Extemal Debt Situation," The AMEX Bank Reviewv Special Papers No. 295. Rakesh Mohan, 'The Morphology of Urbanisation in India," Economic and Political Weekly No. 296. Dean T. Jamison and Peter R. Moock, "Farmer Education and Farm Efficiency in Nepal: The Role of Schooling, Extension Services, and Cognitive Skills," World Development Trade Liberalization, Tariff Redundancy and Inflation: A Methodological Exploration Applied to Argentina By Jan Peter Wogart and Jose Silverio Marques Contents: I. Introduction. - II. Theoretical Considerations, Definitions and Methodology. - III. Empirical Results. - IV. Qualifications and Impact on Inflation. - V. The Impact of the Progam on Output and Employment Growth. - VI. Summary and Conclusions. - Appendix. I. Introduction I nflation and protection have been salient features of many semi-industri- alized nations. Since the former problem, however, was thought to be mainly a fiscal and monetary phenomenon, most post-war stabilization efforts have been of a demand-reducing character. While external sector policies were part and parcel of many orthodox anti-inflationary programs, stabilization of the balance of payments was often in conflict with stabiliza- tion of domestic prices. It has been only in the last few years that attempts have been undertaken to explicitly use the liberalization of goods and factor markets both, in the external and domestic sectors of the economy, to solve short-term inflationary and long-term resource-allocation problems. The monetary stabilization-cum-trade-liberalization approach was intro- duced almost simultaneously in Chile, Argentina and Uruguay in 1978/1979. In its Argentine version the external sector program consisted of (a) the elimination of direct controls on trade and capital flows; (b) the gradual lowering of import tariffs and fees; and most importantly, (c) an "active" crawling peg, i.e., a prefixed schedule of decelerating exchange rate devalua- tions over a certain period of time'. This latter policy had the two-fold purpose of indicating the authorities' target rate of inflation and relieving the Central Bank of exercising a restrictive monetary policy, which so often had Remark: The views expressed in this paper are those of the authors and should not be attributed to the World Bankc, the organization with which they are associated. The authors wish to thank Gerald Alter for discussing and shaping many of the ideas of this essay. For helpful comments thanks go to Julio Nogues, Guillermo Nielsen and Mario Blejer. I The crawling peg has been a tool to maintain international competitiveness in some Latin American countries for several years (especially Brazil and Colombia). However, the adjustments are undertaken ex-post. In contrast, the exchange rate adjustments in Argentina and Uruguay were made ex-ante. For a discussion of the "active" crawling peg, see McKinnon [19801. Liberalization, Tariff Redundancy and Inflation 19 led to serious recession. The liberalization measures in the external sector were accompanied by a liberalization of the domestic factor markets, especial- ly by the rernoval of controls on interest rates. When the Southern Cone countries of Latin America used the monetary-stabilization-cum-trade-liberalization approach to simultaneously lower inflation and improve resource allocation in the late 1970s, economists were reluctant to plunge into an area which formerly comprised three different bodies of literature relating to: (1) causes and consequences of inflation; (2) trade regimes and optimal trade policies; and (3) determinants of economic growth. An elementary framework for analyzing the relationship between trade regimes and monetary macro-aggregates was undertaken by Anne Krueger [1981]t. That framework, however, does not offer an analysis of the possible price-stabilizing impact of a trade liberalization program con- sisting of decelerated devaluation and tariff reductions. Since most industries in the semi-industrialized countries enjoy high levels of tariff protection, part of which they never need nor use, one crucial aspect of this type of program is for the policymaker to know at what point foreign competition can be expected to prevent domestic entrepreneurs from raising their prices indiscriminately. This paper is concerned with a particular issue which arises during the implementation of an anti-inflation-cum-trade-liberalization program, i.e., the elimination of "water in external tariffs" or tariff redundancy of a number of manufactured goods; discussed are its measurement and its implications for domestic inflation, economic growth in industrial output and employment and resource allocation. Empirical data of forty branches of the Argentine manufacturing sector are used here, but emphasis is placed on developing a simple, workable framework which can also be applied to the relevant data available in other countries. In Section II, we present the theoretical underpinnings together with some definitions and methodological consid- erations. Section III contains the empirical results. In Sector IV we introduce some qualifications to the simple model. Section V analyzes the implications of the Argentine trade liberalization measures upon major macro economic variables, and this analysis is followed in Section VI by a short summary and conclusions. II. Theoretical Considerations, Definitions and Methodology For the stabilization attempts in the three Latin American countries of the Southern Cone to function effectively, some crucial assumptions concerning the monetary approach to the balance of payments and the Purchasing Power I Since then, a number of further investigations of both theoretical and empirical nature have attempted to throw some light on the interaction between trade liberalization and domestic inflation [see Corbo, 1982; Fernandez, Rodriguez, 1982; Harberger, 1982; Nogues, 1983 a]. 20 Jan Peter Wogart and Jose Silverio Marques Parity (PPP) theory had to be sound. The PPP theory maintains that, in a world of zero or constant transport costs and no trade barriers or of pure ad valorem tariffs, international commodity arbitrage will ensure equality of domestic and international prices. Whatever the disequilibrium had been before, the Law of One Price would ensure the adjustment of domestic to international prices. The monetary approach to the balance of payments postulates that, once capital and money markets are liberalized, policymakers can determine either the exchange rate or the money supply, but not both. If the authorities opt to fix the exchange rate, as they did in the Southern Cone countries, any current account surplus or deficit will cause an opposite effect on international capital flows'. Excess domestic demand will not increase prices but imports, which, in turn, will generate capital inflows, either directly through trade credits or, if payments are made in cash, by increased demand for money, which will cause interest rates to rise and thus will induce foreign capital to enter. While simple enough in theory, the real issue for the policymaker is to identify those products for which possible excess demand will spill over into the balance of payments and estimate how rapidly actual lower priced imports will have a stabilizing effect on domestic inflation. The analysis of tariff redundancy is a crucial element in looking for an answer to those questions. Tariff redundancy is the difference between nominal protection from foreign competition and protection actually used, where "nominal" or "legal" protection is the sum of a nominal tariff and other fees, including quan- titative restrictions (QRs), applied to imports, and "used" protection is the difference between the price of an item produced locally and the price of the imported product that competes with it. While "used" protection is normally less than "legal" protection, tariff redundancy can take either positive, zero or negative values. It can also be expressed as a ratio, in which case it can be called the rate of convergence between domestic and international prices. Consider a homogeneous product that is both produced locally and imported. Let pd be its ex-factory domestic price, and P't its import price (ex-port of destination) expressed in foreign currency, both at period t. If r is the foreign exchange rate, p', r equals pd in a world of perfect competition, zero tariff and non-tariff barriers, and equal domestic transportation costs and margins. Let T, stand for the rate of protection, which is the sum of nominal external tariff (g,) and import fees (ft), both expressed in percentage In the case of Argentina and Uruguay, the exchange rate was actually not fixed but pre- announced. The effect on interest rates and other variables is, however, the same as in the case of fixed exchange rates. For a discussion, see McKiinnon [1980] and Williamson [1981]. Liberalization, Tariff Redundancy and Inflation 21 terms of the CIF value'. If p, is the competing price of the imported good expressed in foreign currency2, then by definition, tariff redundancy R, and rate of convergence RC, at period t are given by the following relationships: 1t (1 + TO) - (1 ef Pt) (1) RCt = (1 + Tt) / (1 + P,) (2) where Tt = g, + f, and P, = (pd/ pc * r) -1 With R being either greater or smaller than zero, or equal to zero, redundancy will be positive, negative, or zero, respectively. When RCt is equal to one, convergence has been achieved. For the policymaker it is important to know when this point is reached, since it indicates that domestic import-competing producers are pricing their products just at the level warranted by the given protection and exchange rate levels, The values of the variables in equations (1) or (2) in the initial period t = o should be calculated on the basis of direct price information obtained from business firms; it is possible to estimate the rate of convergence at period t i (RC;), even if Pi is unknown. Under this condition, RC; can be approximated by the following equation: RC = (1 + TX) / + PJ ( where/(1p)+) t = Ar/r0 = percentage change in the exchange rate between t = o and t= i, pc = ApC/pc = percentage change in CIF prices expressed in foreign currency, and pd = Apd/pl = percentage change in domestic price. Changes in the rate of convergence between two periods can be explained by changes in T, pd, pc and r. In order to approximate the relative importance of each factor in explaining changes in the rate of convergence, equation (4) is used: RC; (1 + Ti) (1 + pC) (1 + t) / (1 + To) .--=.. - I - (4) RC, (1 + P.) (1 + pd) (1 + P) Transforming equation (4) by using natural logarithms leads to: In RC, - In RC,, ln [(1 + t) (1 + Pc)] + ln (1 + T) - In (I + pd) (5) where T = (T1 - T,)/(1 + To) I In Argentina. these fees conisisted of a freight tax, as well as bank, port and dispatch costs, and a statistical tax until 1980. There were also taxes on specific products such as those on forestry yields and mrineral extractions. 2 pe.r =ptr/ (I +Tt) 22 Jan Peter Wogart and Jose Silverio Marques Whereas the first three terms on the right-hand side of equation (5) reflect the changes in the exchange rate, `i .rnational prices, and external tariffs, all of which increase redundancy if positive, the last item represents the effect of domestic price changes, which reduces redundancy if positive. Once the rates of convergence have been computed for individual goods, it is useful to aggregate the results. The choice of the weights for the aggregation of individual industries depends upon of the objectives of the analysis. If the main purpose is to assess the impact of the elimination of overall redundancy on domestic inflation, the weights of a price indicator, e.g., the wholesale price index (WPI) should be used. If, on the other hand, policymakers are more interested in analyzing the impact on output, growth, and employment, the contribution to industrial value added of the individual subsectors should be used. Since policymaking implications are important in either case, both methods will be used here. HII. Empirical Results The tariff redundancy estimates, which are tabulated in the Appendix, are based upon direct price comparisons between Argentine and other countries' internationally traded industriel products'. The base period is June 1977, and two estimations of tariff redundancy as of January and August 1979 were performed for forty product groups. Consider, for instance, the first item in the table, yarn. The values for tariff redundancy R, and rate of convergence RC, in June 1977 were computed by using equations (1) and (2) as follows: R,= (1 + .84) - (1 + .14) = .70 RC,0= (1 + .84)/(1 + .14)= 1.61 where 1 + PO= 1 + .14 and 1 + To= 1 + .84 Price ratios for January 1979 (P,) were estimated by using equation (3), where t = 170 percent is the rate of peso devaluation against the U.S. dollar, pc = 2.1 percent is the price increase of yarn as approximated by the U.S. producer prices, and pd = 456 percent is the price increase of yarn as given by the Argentine wholesale price index. The rate of protection for the base period and for the two estimation periods appear in Columns (4), (10) and (16), During the first semester of 1979, yarn and a number of other industrial products were subject to temporary tariff cuts2; the corresponding values for the rate of protection, tariff redundancy, and rate of convergence are shown in parentheses under Columns (16)-(18). ' The base period data were obtained from a direct price survey undertaken by a team of economic researchers at the Central Bank of Argentina in March 1977 [see Berlinski, 1977]. They were adjusted for June 1977 by the Secretariat of Commerce because they had been held artificially low by previous wage and price controls, which were abandoned subsequently. 2 The temporary tariff cuts were implemented in cases in which manufacturers set their price increases substantially above the target rate indicated by the prefixed monthly rate of devaluation. Liberalization, Tariff Redundancy and Inflation 23 In June 1977, tariff redundancy was positive and relatively high for all forty product groups incluided in the sample. Transport equipment, metal products and non-metallic minerals revealed the highest tariff redundancy, whereas paper products, scientific equipment and basic metals had the lowest. Two years later, in January 1979, the picture had changed substantially, with 22 out of the 40 products experiencing "negative" redundancy, implying that domes- tic producers had priced their products at a level above that warranted by the exchange rate devaluation, changes in international prices and changes in the protection level. Specificaliy, it implies that imported products, still disregarding domestic transport costs and margins, could have been sold in the Argentine market at prices below those of their domestic competitors'. In the case of yarn, for example, given a level of protection of 68 percent, the relative price of domestic yarn would have had to decrease by 27 percent (1 - .73; Column (12) of Appendix table) to be at the level of the "theoretical" Table 1 - Argentina: Rates of Convergence of Major Manufacturing Subsectors Weights" according to june January August WPI VA 1977 1979 1979 Textiles .................... 1.69 .92 .68 30.2 11.4 Clothing ..................1.20 .43 .38 7.2 1.9 Paper & pulp ...............1.59 .89 .70 4.1 3.6 Chemical substances ......... 1.61 .83 .77 3.5 7.7 Other chemicals ............ 2.50 .95 .74 4.1 9.9 Rubber products ........... 2.00 1.19 1.01 2.2 2.4 Glass & glassware .......... 2.27 .70 .58 3.2 1.0 Cement and other non-metallic minerals ............... 2.13 .79 .52 3.4 4.4 Iron & steel ................ 1.45 1.14 1.06 5, 9 8.6 Non-ferrous metals ......... 1.72 1.01 .72 3.6 0.9 Metal products ............. 2.44 1.41 1.01 12.9 7.6 Non-electric machinery ...... 1.56 1.30 1.05 5.1 12.5 Electrical machinery and apparatus ............ 1.69 .97 .72 9.3 6.0 Transport equipment and vehicles ...... .......... 2.08 1.79 1.52 5.1 21.9 Scientific equipment ........ 1.35 .69 .56 .2 .4 Total (WPI weights) ....... 1.79 .90 .72 100 - Total (VA weights) ........ 1.81 1.09 .87 - 100 aWPI = Index of wholesale prices, VA = Value added. Source: Computed from table in Appendix. - Value added weights from Central Bank 119791. The reasons why this could happen are explored in Section IV. 24 Jan Peter Wogart and Jose Silverio Marques imported good price, inclusive of tariff and import fees. Tariff redundancy was further reduced by August of 1979, with only 1-0 product groups revealing positive redundancy (two of them nearly achieving convergence) and 30 ex- periencing negative redundancy. Table 1 shows the aggregated rates of convergence for the three periods and 15 industrial subsectors, using the weights of the WPI and industrial value added. Both aggregations show a similar decline in redundancy. In August 1979, the WPI aggregation shows an overall negative redundancy of 28 per- cent (1 - .72). This means that there were strong pressures for industrial product prices to come down, once imports would be allowed to enter without administrative delay. If one considers that these industries4have a weight in the WPI of roughly 50 percent, the elimination of negative tariff redundancy could have been expected to reduce the domestic inflation rate by roughly 10 percentage points below the convergence rate with international inflation'. Table 2 - Argentina: Rates of Convergence, Basic Statistics June f January August 1977 1979 1979a Simple mean full sample ................. 1.86 1.04 0.86 (0.83) adjusted sampleb ............. ... 1.86 1.03 0.84 (0.80) Standard deviation full sample ................. .. 0.44 0.31 0.32 (0.32) adjusted sampleb ............. 0.40 0.27 0.25 (0.26) Maximum value full sample ................. 2.85 1.85 2.00 (2.00) adjusted sampleb ............. 2.81 1.77 1.52 (1.52) Minimum value full sample ................. 1.10 0.43 0.38 (0.38) adjusted sampleb ............. 1.23 0.65 0.51 (0.40) Range full samp ....................... 1.75 1.42 1.62 (1.62) adjusted sampleb ............. , . 1.58 1.12 1.01 (1.12) a Data in parentheses take into consideration temporary tariff cuts. - b Extreme values are eliminated from full sample. Source: Table in Appendix. I This is a rough estimate, since the aggregated weights as well as the selection of one commodity as representative of each industry hide expected diverse behavior of commodity prices within each group. Liberalization, Tariff Redundancy and Inflation 25 Table 2 presents the means and measures of variations for rates of convergence. The simple means of the rates of convergence were 1.86, 1.04 and 0.86 percent in June 1977, January 1979 and August 1979 respectively. The measures of dispersion indicate that the variation of the convergence rates decreased between June 1977 and January 1979, but increased slightly afterwards. The standard deviation declined from .44 in June 1977 to 31 in Jaxnuary 1979 and increased slightly to .32 in August 1979. The range followed similar trends, declining from 1.75 to 1.42 and then rising to 1.62 percent, respectively. Both the standard deviation and the range continued to fall, however, only slightly after extreme values were excluded'. The implications of the 1977-1979 decrease in the variation of the redundancy of rates are twofold: First, it shows that the elimination of redundancy was affecting industries in a rather even fashion and, thereiore, promoting foreign com- petition across most industrial sectors until January 1979, when it seemed that overall tariff redundancy had been eliminated; and second, during the first semester of 1979, the trend of diminishing differences among the industries affected by the liberalization measures was practically halted; temporary tariff cuts for individual products may have been partly responsible for this change. An assessment of the relative importance of the four factors influencing the rate of convergence was made for fourteen product groups which showed the greatest decline in redundancy between June 1977 and January 1979. Equation (5) abo-ve was used in the exercise, and Table 3 reports the results2. As mentioned, decreases in the rate of protection and/or increases in do- mestic prices reduce redundancy and lead to convergence, whereas increases in international prices and/or exchange rate devaluation increase redundancy. Column (1) in Table 3 shows the difference between the natural logarithm of the rate of convergence of January 1979 and that of June 1977. This dif- ference is roughly equal to the sum of the logarithm of domestic price increase (Column(2)) and the logarithm of the rate of protection (Column (5)), minus the logarithm of the changes irn the exchange rate and international prices (Columns (3) and (4))3. One important issue is to compare the impact of tariff cuts versus the nominal devaluation of the exchange rate on the rate of convergence. As becomes apparent from Columns (4) and (5), the reduction of external tariffs and its impact oIn reducing the domestic-international price differential was more than compensated by the rate of devaluation. However, in order to I Because of the relatively small domestic price increase of tanning materials, redundancy re- mained positive for this item through 1979 (see table in the Appendix). 2 All the values in equation (5) were multiplied by minus one, since there was a decrease in redundancy. 3 Due to rounding, the sum may not equal the total. Note that the logarithm of the rate of protec- tion is negative, explaining why it appears as orn additive term. Table 3 - Argentina: Relative Importance of Factors Explaining Cr-anges in Redundancy Levels Between June 1977 and January 1979 Difference Change in Exchange in Conver- . Rate Change in (1)-(3) e(6) LTiT T1 Protection Selected Subsectors gence Domestic Internatio- Devalua- Protection Rate Rates Prices nal Prices tion Level Jan. 1979 (1)a (2)a (3) (4) (5)a (6)b (7)C (8)d (9)e (10) Yarn .............. ... .79 1.72 .03 .99 -.09 .76 .47 -.53 -.14 .68 Cloth ................. .36 1.26 .03 .99 -.11 .33 .72 -.38 .17 .70 0 Socks ................. 1.04 1.91 .03 .99 -.16 1.01 .36 -.64 -.21 .89 O Shirts ...................1.04 1.91 .03 .99 -.16 1.01 .36 -.64 -.21 .89 Liquid and compressed gas 1.05 1.95 .13 .99 -.22 .92 .40 -.60 -.30 .39 Synthetic fibres ......... .56 1.50 .04 .99 -.09 .52 .59 -.41 .09 .68 Paints & varnishes ...... .95 1.68 .07 .99 -.33 .88 .41 -.49 -.01 .39 Glass and glassware ..... 1.05 2.00 .13 .99 -.17 .92 .40 -.60 -.24 .59 cn Cement ............... 1.01 1.76 .17 .9S -.24 .R4 .43 -.57 -.27 .34 Electric machinery ...... .45 1.45 .12 .99 -.09 .33 .72 -.38 .20 .75 Communication equipment 44 1.45 .12 .99 -.09 .32 .73 -.37 .38 .72 o Electric bulbs and tubes . . .94 1.59 -.13 .99 -.46 .81 .44 -.56 .06 .34 0 Tractors ............... .41 1.50 .12 .99 -.14 .29 .75 -.25 .48 .72 to C Scientific equipment ..... .67 1.45 .11 .99 -.31 .56 .57 -.43 .05 .34 a Natural logarithms of absolute values. - b Difference in redundancy rates not accounted for by changes in international prices. - c Inverse function (exponential) applied to values of Column (6) multiplied by -1 to show a decrease. - d Hypothetical change in the rate of protection to achieve estimated change in rates of convergence. - e Hypothetical level of protection rate in January 1979, necessary to achieve estimated reduction in rates of convergence. Source: Table in Appendix. Liberalization, Tariff Redundancy and Inflation 27 evaluate the role of devaluation, changes in domestic prices vis-&-vis the direct impact of the devaluation have to be taken into account. Ccoumns (2) and (4) in Table 3 show that the increase in domestic prices had a much greater importance in reducing redundancy than devaluation had in maintain- ing it'. On average, for the 14 products sampled here, tariff cuts explained 25 percent of the differences in convergence rates, whereas the real apprecia- tion of the peso was reponsible for 75 percent of that change. Another interesting issue to pursue is to test the potential of external tariff changes by holding the real exchange rate constant and by computing the cuts in the rates of protection necessary to produce the rate of con- i rgencc which was actually achieved (Columns (6) through (10) in Table 3). lumn (6) shows the decrease in rates of convergence not explained by changes in international prices, and Column (7) shows the result of applying the inverse function to the values in Column (6). In the case of yarn, Column 5) shows that the rate of protection for yarn declined by 9 percent during the period. In order to have the rate of convergence declining from 1.61 to .73 in the period, under the assumption that the real exchange rate remained constant, and given actual changes in international prices, the rate of protection should have been reduced by 53 percent (1 - .47; Column (7)). To achieve this tate of decline in the rate of protection, and given its initial level, equation (5) implies that protection should have been negative in January 1979, corresponding to a tax of 14 percent on the domestic good (Column (9)). This subsidy to imports contrasts with the actual positive protection level of 68 percent (Column (10), Table 3)2.Column (9) shows that, under the present assumptions, subsidies to 7 out of the 14 import product groups would have been necessary to achieve a decline in redun- dancy equal to the estimated ones. Furthermore, if one considers that other fees were in all cases equal to or greater than 24 percent (see table in the Appendix), negative tariffs would have been necessary in 12 out of the 14 product groups to achieve the estimated rates of protection in Column (9), which contrast with the actual ones in Column (10). To sum up, the rapidly declining real exchange rate was the policymakers' most important means of enforcing competition, leading to potential price reductions which would not have been possible had they used other instruments. Hiowever, by switching from relatively high to "negative" protection in a short period of I Although the rate of devaluation and the rate of domestic price increases are known to interact, the present framework considers only direct effects. 2 Thc rate for yarn was obtained as follows: Using (5), and setting ln(I + pd) = ln(1 + i) we have: In RC, - In RC, = In(1 + pc) + ln(l + T'). where: T'= (T', - T.)/(1 + TO) Substituting the values for yarn from Columns (1), (3), and (6) yields: .79 = .03 + .76 The values in Column (10) were then obtained as follows: T' = e-.76 - 1 = -.53 = (T'1 - .84)/1.84 and T'1 = -.14 28 Jan Peter Wogart and Jose Silverio Marques time, it laid also the basis for a serious misallocation of resources in the industrial sector. IV. Qualifications and Impact on Inflation The preceding analysis is based on the functioning of the Law of One Price. A few aspects of this law, referring to product homogeneity, local margins and transport costs, will be highlighted in this section. In addition, some other aspects, such as lags involved in the impact of negative re- dundancy on domestic prices and developments in market structure, are also briefly discussed. After the contributions of Chamberlin and Robinson in the 1930s, economists have become more aware of artificial or real product differentia- tions as key elements in market stratification. Two products, which are identical in everything but the brand name under which they are sold, can appeal to different groups and therefore have different equilibrium prices. Thus, prices and margins ftor imported and import-competing goods may well differ. The same may be said in relation to internal transport costs, since there is no a priori reason to assume that imported and import-competing goods use the same channels to arrive at the final consumer market. While trying to avoid some of these problems by referring to ex-factory and ex-port prices and by using the wholesale price index, there is still the assumption that the latter two prices should be equal in equilibrium. It is only in that context that the concept of redundancy is relevant. Consider, however, the case where the two products - the imported one and the locally produced one - are not homogeneous but are close substitutes. If there is a constant spread between the two prices, then our methodology can easily be adjusted to accommodate that case. The level of redundancy, in particular, would have to be reinterpreted in that light. As seen in Section III, negative redundancy was present in many industries in January 1979, and had increased further in August 1979. On the other hand, the impact of this phenomenon on overall inflation in Argentina became apparent only in the last quarter of 19791. This lag is explained by product differentiation and the adjustments required of consumers to react to new imported products on the demand side, and by the rigidities of previously protected import channels as well as high and volatile price changes on the supply side2. Traditionally, Argentina has had weak and insignificant distribution channels among importers, wholesale dealers, and retailers. There is evidence that beyond the expected substitution in con- sumption and production,which negative redundancy implies, there was also Wholesale price changes declined, on an annual basis, from 177 percent in the first three quarters of 1979 to 31 percent in the fourth quarter of the same year. 2 For a discussion of the role of an unexpected and uneven rate of inflation, see Blejer and Hillmann [1982]. Liberalization, Tariff Redundancy and Inflation 29 substitution in commercialization. This latter adjustment means that import- competing industries bought and sold imported products which they had previously competed with. Producers of hardware, for instance, began to import some foreign hardware products, and in domestic production special- ized in fewer products. Concentration of industrial ownership is estimated to have increased in Argentina during the period, contributing to the lag of nine months which negative redundancy needed to have some impact on inflation'. Indeed, several domestic producers had control over the path of adjustment to foreign competition2. While the adjustment process differed significantly from industry to industry, and even from firm to firm within a given branch of industry, a trend of gradual price stabilization was discernible by the last four months of 1979. The deceleration of monthly price increases from an average of 7.7 percent during the first eight months of 1979 to an average of 3.8 percent after September 1979 was made possible by precipitous cuts in the rate of increase of production costs, which had started in July of the same year. Both of these trends are shown in the figure below and are contrasted with external price increases, the rate of devaluation, and the overall non-agricultural wholesale price index. Average Monthly Cost and Price Increases of Industrial Firms Compared with Increases in Wholesale Prices, Devaluation and Intemational Inflation, 1979 I - 1980 IV percent 10 - .industriot costs . - industrial prices -- non-agricultural wholesale prices 8 Zemte of deycitut ton . . . . . . international prices adjusted : i for rate of devatuatlont .: convergience of domnestic 6 .industrfai prices with w~ i\ntional prices 4 2 .--.---- - --- 0- - 1979 1980 Note that the major stabilization policies were announced in late 1978, and implemented in early 1979, 2 For some further evidence on the compatibility of negative redundancy and monopolistic behavior, see Nogues [1983 bl. 30 Jan Peter Wogart and Jose Silverio Marques Table 4 - Absolute and Relativea Price Increases in Industry, 1977-1980 (percent) 1977/78 1978/79 1979/80b abs. rel. abs. rel. abs. rel. I Prices of industries with (1) continuously high effec- tive protection Sugar & products ........ 117.7 84.9 113.8 92.7 87.5 116.7 Tobacco products ........ 159.5 101.2 131.8 100.5 84.3 114.7 Printing & publishing .... 197.5 116.0 141.9 104.9 106.7 128.6 Pharmaceuticals ......... 159.6 101.2 119.3 95.1 92.8 120.0 Petrochemicals .......... 155.6 99.6 102.3 87.7 97.4 122.8 Cement ................ 207.0 119.7 188.4 125.3 92.8 120.0 Industrial construction .... 137.0 92.4 161.2 113.7 99.2 124.0 Iron & steelC ............ 150.3 101.1 103.7 88.8 76.9 110.1 Automobiles & parts ..... 130.9 90.0 133.6 101.3 81.8 113.2 Rubber products ......... 154.2 99.1 126.8 98.4 83.6 114.3 Group (1) average ..... 156.9 100.2 132.3 100.1 90.3 118.4 (2) increased import competition Food & beverages ........ 166.5 103.9 132.9 101.0 53.2 95.3 Meat packing ........... 177.6 108.2 160.6 113.0 51.0 94.0 Textiles & clothing ....... 162.9 102.5 156.9 111.4 49.7 93.2 Paper & products ........ 160.9 101.7 170.9 117.5 49.8 93.2 Leather & leather products. 145.2 93.1 208.1 159.3 39.7 86.9 Cosmetics & cleaning material .............. 204.1 118.6 130.6 100.0 73.1 107.8 Metal products .......... 118.6 85.3 145.7 106.6 41.4 88.0 Electr. mach. & apparatus . 143.8 95.0 122.4 96.5 64.5 102.4 Tractors ................ 130.2 89.8 130.6 97.4 61.6 100.6 Group (2) average ..... 156.6 100.0 151.0 108.8 53.8 95.7 II Comparative price indicators Non-agric. wholesale prices . 156.5 100.0 130.6 100.0 60.7 100.0 Imported product prices .... 75.9 68.5 93.0 83.7 61.7 101.7 Construction prices ........ 137.0 92.4 161.2 113.7 105.0 128.0 Consumer prices .......... 175.5 107.4 158.4 112.1 84.0 114.5 aThe relative price is defined by the ratio between changes in industrial prices (1 + plO) and overall non-agricultural wholesale prices (1 + NA)- - b September 1979 to September 1980. - c Basic metals remained protected by quantitative restrictions but since government price policy for major products followed the changes iidicated by preannounced exchange rate devaluation, that branch could also be classified into the second group. In that case, the variance of the inflation rates between the two group averages would have been even wider. Source: INDEC [var. iss.]. Liberalization, Tariff Redundancy and Inflation 31 The tendency of a significantly lower rate of inflation continued during the first four months of 1980. However, by mid-1980 the gap between international inflation, adjusted for devaluation, and domestic price increases widened again, reflecting the apparent inability of industrial firms to reduce costs further. Not all firms and industries were under competitive pressure, since uneven protection continued to provide shelter for a number of in- dustries. Real wages had grown strongly in 1979; although they were brought down somewhat in early 1980 by those firms facing increased competition, they continued to increase during 1980 for most firms producing goods and services not affected by international competition'. In addition, the macro- economic framework was seriously weakened by the financial crisis in April 1980, which reinforced the doubts of the industrial entrepreneurs'and managers concerning the sustainability of the new strategy. With so many events interfering with the price-converging mechanism, it can be argued that the Purchasing Power Parity theory had no chance of succeeding in Argentina. The high degree of variance in price changes among major industrial branches reflects the remnants of different degrees of protection in the Argentine manufacturing sector (see Table 4). If protection had been both equalized and lowered as in the case of Chile, it woud have been possible to reach a better degree of convergence and, thereby, price stabilization. However, the question remains whether it would have been a viable aolution beyond the short run. It is to the impact of the program upon output and employment growth that we turn to next. V. The Impact of the Program on Output and Employment Growth In order to improve industry's competitiveness and to reduce distortions in resource allocation and relative prices, goods and capital markets had been progressively opened up to foreign competition after 1976. Tariff reductions in 1976, the application of a five-year tariff liberalization schedule reinforced byr specific tariff cuts in 1979, and, most importantly, the real appreciation of the peso brought a good part of domestic industry face to face with external competition. The manufacturing firms were expected to respond to the challenge by adjusting the composition and quality of output through eli- minatin,, the use of redundant factors, and by shifting to more efficient techniques of production. Subsector statistics for the period between 1978 and 1980 seem to partially bear out the intended results. While imports were increasingly penetrating the domestic market, rising from 19 percent of total industrial supply in 1975/76 to 25 percent in 1979/80, productivity gains became widespread in most manufacturing subsectors. After the 1978 recession, total manufacturing I The imnpact of high differential borrowing costs may have been more damaging for many firmns. The figure above, however, captures only production costs. Table 5 - Output, Employment, and Productivity Changes 1977-1980 (1970 = 100) L-1 1977 1978 1979 1980 Industries Output Employ- Produc- Output Employ- Produc- Output Employ- Produc- Output Employ- Produc- menta tivity menta tivity menta tivity menta tivity (1) With continuing high effective protection Cigarettes & tobacco. 121.8 112.3 108.5 123.2 111.6 110.4 131.2 106.3 123.4 126.9 100.7 126.0 Printing & publishing 97.4 81,9 118.9 100.4 80.9 124.1 93.2 80.1 116.5 98.5 88.9 110.8 Pharmaceuticals & other chemicals ... 126.4 103.4 121.7 112.2 89.6 125.2 120.6 85.6 140.9 127.0 83.0 153.0 Rubber products .... 149.1 136.7 109.1 130.7 121.0 103.7 102.2 144.4 1123 151.2 132.6 114.0 0 Cement & other non- metallic minerals 117.3 97.8 119.1 116.8 92.8 124.8 121.9 95.6 127.5 118.4 91.7 129.1 Iron & steel ........ 119.9 130.9 91.6 101.3 118.1 85.8 185.0 120.2 153.9 180.2 113.2 159.2 Non-ferrous metals 109.3 147.3 74.2 95.9 138.2 69.4 129.8 145.0 89.5 139.0 138.2 100.6 Transport materials .. 118.3 125.9 94.0 93.3 101,0 92.4 128.6 110.3 116.6 144.0 106.6 135.1 0 Group (1) average . 119.9 117.0 102.5 110.4 106.7 103.5 126.6 110.9 114.2 135.1 106.9 127.0 (2) With increased import competition Food & beverages ... 111.7 120.4 97.2 107.8 115.1 93.7 116.7 115.9 100.7 117.9 115.8 101.8 0 Textiles & clothing .. 115.3 100.1 115.2 96.5 99.0 97.4 109.4 96.1 113.9 92.8 65.1 142.6 Leather goods & shoes 91.1 121.8 74.8 89.6 107.1 83.7 82.0 101.4 80.8 70.9 81.9 86.5 Paper & carton 115.1 119.9 96.0 118.7 121.0 98.1 133.0 121.7 109.3 108.9 101.3 107.5 C Chemicals .......... 140.0 118.5 118.1 120.2 107.4 119.9 152.7 107.3 142.3 131.8 99.9 131.9 Glass & porcelain ... 93.0 103.9 89.5 93.5 104.3 89.6 106.5 109.4 97.3 100.8 101.3 99.5 Metal products ..... 135.0 113.2 119.3 115.0 102.7 112.0 131.4 109.8 119.7 123.4 96.8 127.5 Machinery ......... 163.3 99.8 163.6 122.6 85.5 143.4 130.6 87.3 149.6 118.5 73.7 160.8 Group (2) average 120.5 112.2 109.2 107.9 102.8 104.7 120.2 105.9 114.2 108.1 91.2 118.7 a Working hours per year. Source: Ministry of Economy, Treasury and Finance [19811. Liberalization, Tariff Redundancy and Inflation 33 output rose substantially in 1979, but continued to advance in 1980 only in those sectors which still enjoyed a substantial degree of protection (Table 5). All firms laid off workers on a rather massive scale, with overall industrial employment being 25 percent less in 1980 than in 1975. As expected, employment cuts were especially severe in those firms that were more exposed to external competition, leading to sizeable productivity increases in some subsectors. But among that group there did not emerge a pattern of selection according to comparative advantage. In those branches in which one would have expected continuous output and productivity gains, such as food and leather products characterized by their favorable natural resource endowment and machinery with its skill intensity, output hardly advanced or fell and labour productivity advanced less than the group average. This occurred at the same time as imports were increasingly penetrating the domestic market, rising from 19 percent of the total industrial supply in 1975/76 to 25 percent in 1979/80. The situation deteriorated rapidly in 1981. That year saw the liberalization attempt being gradually abandoned and several massive peso devaluations; industrial output fell precipitously by over 10 percent and so did industrial employment. However, while laid-off workers had been able to find jobs in the non-tradeable sector until 1980, output and income fell in that sector, in 1981, since it suffered similarly from financial strains as did the rest of tee economy1. As -a consequence, open unemployment more than doubled, increasing from 2.6 percent in October 1980 to 5.8 percent in April 1982. Manufacturing output fell by another 4.5 percent in 1982 and was not able to recover in 1983. Whlat started as a promising approach to stabilize prices and improve resou-ce allocation in industry ended in the deepest and longest recession Argentina has experienced since World War II. While a large part of the problem emanated fromn the financial sector, it nevertheless became clear that the trade liberalization route of price stabilization was at least as costly as the traditional demand-oriented price stabilization programs, if not costlier. VI. Summary and Conclusions The main purpose of this paper was to present a simple framework for analyzing the impact of various import liberalization measures on the poten- tial competitiveness of the industrial sector. The major instruments used and their relative efficacy were compared and evaluated, In the case of Argentina, it was demonstrated to what extent tariff redundancy was eliminated through the exchange rate policy of the authorities. Reductions in external tariffs I For a more detailed analysis of the financial liberalization effort and its impact in Argentina, see Fernandez and Rodriguez (19821, and Wogart (19831. Weltwirtschaltliches Archiv Bd. CXX, 3 34 Jan Peter Wogart and Jose Silverio Marques were of secondary importance. Although the sample of industries we used did not include the food, beverage and tobacco nor the wood and furniture inrdustries (ISIC 31 and 33), it was shown that tariff redundancy had been eliminated in two thirds of the major manufacturing branches by early 1979, at a time when the authorities began to apply the "active" crawling peg and discriminating tariff reductions. While we have not attempted to evaluate the effectiveness of these temporary tariff cuts, it is noteworthy that 9 of the selected 11 industrial branches would have experienced negative redundancy and thereby would have been subject to intense foreign competition even without these specific tariff measures, Although the redundancy analysis is not a forecasting tool, it indicates the possible amount of price deceleration which can be expected under long-run price convergence, It would seem indeed that convergence calculations based on the PPP thesis can be used correctly only when individual product prices in international and domestic markets are compared. As Table 1 has shown, the analysis also points at the future impact of an "overshoot" on industrial activity and imports. The methodology presented here can be refined in many ways, but the major policy implications should become clear from the foregoing analysis. Programs of import liberalization should include some device to monitor the price evolution of domestic traded goods and imports, thus enabling policymakers to identify at an early point in time the effects that various measures may have on the competitiveness of individual industrial subsectors as well as industry as a whole. This approach may avoid uneven treatment and the possible sacrifice of firms and branches which, under normal conditions, could and should survive. Liberalization, Tariff Redundancy and Inflation 35 Appendix Argentina: Approximation of Redundancy in External Tariffs of 40 Selected Products or Product Groups (percent) June 1977 Nominal Rate of Imputed Rate of Implied Externtal Import Protec- Redun- Conver- Tariff1 TariftD Fcesc tionW dancye gencef (Po) (go) (fo) (To) (RV) (RCo) (1) (2) (3) (4) (5) (6) Textiles & clothing Yarn ........... ............ 14 60 24 84 70 1.61 Cloth . .................. .....11 65 24 889 78 1.70 Socks ........................ - 12 95 24 119 131 2.49 Shirts ........................ 79 95 24 119 40 1.22 Paper & paper products Pulp ......................... - 21 5 28 33 54 1.68 Paper ... ................... 6 20 34 54 48 1.45 Chemicals Liquid & compressed gas -21 50 24 74 95 2.20 Tanning materials .............. -38 50 24 74 112 2.81 Basic chemical substances -2 50 24 74 76 1.78 Fertilizers .................... - 14 50 24 74 88 2.02 Pesticides ........ ...... .. 32 65 24 89 57 1.43 Synthetic resins ............... 10 70 24 94 84 1.76 Synthetic fibers ................ 49 60 24 84 35 1.23 Painits and varnishes ........... .... - 21 70 24 94 115 2.46 Rubber products Tires ........................ 2 80 24 104 102 2.00 Non-metallic minerals Glass & glassware ............. . .. 12 65 24 89 101 2.15 Cement ..................... - 21 45 24 69 90 2.14 Basic metals Iron and steel .................. 27 50 34 84 57 1.45 Non-ferrous metals ............. 16 45 28 73 57 1.49 Metal products Metal containers ............... - 1 65 28 93 94 1.95 Cans .......... ........ --21 65 28 93 114 2.44 Ovens and stoves ............... - 11 100 28 128 139 2.56 Non-electric machinery Motor and turbines ............. 5 65 28 93 88 1.84 Agrcultural machinery .....: -15 65 28 93 108 2.27 Metal & wood working machinery................. - 2 65 28 93 95 2.19 Machine tools ..... ............. 8 65 28 93 85 1.78 Office machines ................ 74 65 28 93 19 1.10 Elevators ...................... 30 65 28 93 63 1.48 Refrigerators & air conditioning ........... - 20 100 28 128 148 2.85 Electrical machinery & accessories Electrical machinery ............ 6 65 28 93 87 1.82 Radio and T.V .................. 35 100 24 124 89 1.67 Communication equipment 34 65 24 89 55 1.41 Batteries ...................... 21 95 24 119 98 1.81 Electrical bulbs & tubes 29 90 24 114 85 1.67 Electrical conductors ............ 16 70 24 94 78 1.67 Transport equipment Railways equipment ............ 2 78 34 112 110 2.07 Auto engines ................... 6 95 32 127 121 2.14 Tractors - 9 65 32 97 116 2.16 Motorcycles & bicycles 65 93 32 125 60 1.36 Scientific equipment .............. 36 60 24 84 48 1.35 (continued) 3* 36 Jan Peter Wogart and Jose Silverio Marques (continued) january 1979 Nominal Rate of Imputed Rate of Implied Extemal Import Protec- Redun- Conver- Tariffg Tariffb Feesc tion' dancy5 gencef (PO) (gl) (fi) (Ti) (R1) (RC1) (7) (8) (9) (10) (11) (12) Textiles & c'othing Yarn .................130 44 24 68 - 62 .73 Cloth .................. 42 46 24 70 28 1.19 Socks .................. 115 65 24 89 -26 .88 Shirts ..................... 338 65 24 89 -249 .43 Paper&8 paper products Pulp. ...................... 52 10 28 38 -14 .91 Paper ....................... 76 20 34 54 -22 .87 Chemicals Liquid & compressed gas , 80 15 24 39 -41 .77 Tanning matenals. -25 15 24 39 64 1.85 Basic chemical substances 57 28 24 52 -5 .97 Fertilizers ..................... 43 13 24 37 -6 .95 Pesticides ..............85 39 24 63 -22 .88 Synthetic resins 80 39 24 63 -17 .90 Synthetic fibers ..139 44 24 68 -71 .70 Paints and varnishes ............ 46 15 24 39 -7 .95 Rubber products Tires ......................... 45 47 24 71 26 1.17 Non-metallic minerals Glass & glassware ............ 113 35 24 59 -54 .75 Cement ....................... 70 10 24 34 -36 .78 Basic metals Iron and steel .................. 50 36 34 70 20 1.13 Non-ferrous metals ............. 59 35 28 63 4 1.02 Metal products Metal containers .............. 5 40 28 68 63 1.60 Cans ......................... 8 10 28 38 30 1.27 Ovens and stoves ............... 44 50 28 78 34 1.23 Non-electric machinery Motor and turbines ............. 27 50 28 78 51 1.40 Agricultural machinery 48 46 28 74 26 1.17 N(etal& wood working ' machinery ............35 48 28 76 41 1.30 Machine tools ...........37 48 28 76 39 1,28 Office machines .............. 157 50 28 78 -79 .69 Elevators ...................... 85 48 28 76 -9 .95 Refrigerators & air conditioning ........... -89 55 28 83 -6 .97 Electrical machinery & accessories Electrical machinery ............ .50 47 28 75 25 1.16 Radio and TV.................. 85 75 24 93 14 1.05 Communication equipment 89 48 24 72 -17 .91 Batteries ...............93 40 24 64 -29 .84 Electri,.al bulbs & tubes 105 10 24 34 -71 .65 Electrical conductors ............ 64 46 24 70 6 1.03 Transport equipment Railways equipment ............. 25 50 34 84 59 1.47 Auto engines ............--------23 85 32 117 94 1.77 Tractors ............... . 20 40 32 72 52 1.43 Motorcycles & bicycles ...... . 145 75 32 107 - 38 .84 Scientific equjipment ............. -94 10 24 34 - 60 .69 (continued) Liberalization, Tariff Redundancy and Inflation 37 (continued) August 1979 Nominal Rate of Imputed Rate of Implied Extemal Import Protec- Redun- Conver- Tariff, Tariffb Feesc tiond,g dancyeS gencef (P2) (92) (f2) T2) (R2) (RC2) (13) (14) (15) (16) (17) (18) Textiles & clothing Yarn ................... 167 42 (15) 24 62 (39) - 101 (- 130) .61 (.52) Cloth ..................134 44 24 68 - 66 .71 Socks ...... ......... ...142 45 24 69 -73 .70 Shirts .................. 393 63 24 87 - 306 .38 Paper & paper products Pulp ................... 92 10 28 38 - 54 .71 Paper ...................125 20 34 54 -71 .68 Chemicals Liquid & compressed gas 71 15 24 39 - 32 .81 Tanning materials .... ..-33 10 24 34 67 2.00 Basic chemical substances . 58 25 24 49 -9 .94 Fertilizers ................. 61 13 24 37 -24 .85 Pesticides ................. 95 34 24 58 - 37 .81 Synthetic resins 7 8 8...78 37 24 61 -17 .90 Synthetic fibers 171 1..171 30 24 54 -117 .56 Paints and varnishes 75 75 15 24 39 - 36 .79 Rubber products Tires .................... 68 45 24 69 1 1.00 Non-metallic minerals Glass & glassware .........150 23 24 47 -103 .58 Cement .................141 0 24 24 -117 .51 Basic metals Iron and steel ............ 58 34 34 68 10 1.06 Non-ferrous metals ........126 36 28 62 -64 .71 Metal products Metal containers .......... 67 40 28 68 1 1.00 Cans ................... 32 16 28 44 12 1.09 Ovens and stoves ..........70 36 28 64 -6 .96 Non-electric machinery Motor and turbines ........ 48 48 (0) 28 76 (28) 28 - 20) 1.18 (.86) Agricultural machinery 55 26 (0) 28 54 28) - I - 27) .99 (.83) Metal & wood working machinery ..... 64 23 0) 28 51 (28) - 13 - 36) .92 (.78) Machine tools. 61 22 0 28 50 28) -11 - 33) .93 (.79) Office machines ............ 220 38 0 28 66 28 -154 -192) .51 (.40 Elevators ................125 23 0 28 51 28 -74 - 97) .67 (.57) Refrigerators & air conditioning ... 31 48 28 76 45 1.34 Electrical machinery & accessories Electrical machinery 80 29 (0) 28 57 (28) -23 (- 52) .87 (.71) Radio and TV ......V ; . 132 73 24 97 - 34 .84 Communication equipment. 128 23 (0) 24 47 (24) -81 (-104) .64 (.54) Batteries ................200 22 (0 24 46 24) - 154 (-176) .48 (.41) Electrical bulbs & tubes ... 131 10 O( 24 34 24) - 97 (- 107) .58 (.53) Electrical conductors 97 43 24 67 -30 .84 Transport equipment Railways equipnient 31 48 34 82 51 1.39 Auto engines ......... 49 93 32 127 78 1.52 Tractors .................49 40 32 72 23 1.15 Motorcycles & bicycles 209 62 32 94 - 115 .62 Scientific equipment ........141 10 24 34 -107 .55 Difference between dome stic (pd) and international prices (pc - r) measured in local cur- rency and based on data supplied by the Ministry of Economy, Secretariat of Commerce.- b Data from Gu(a Prdctica del Exportador e Importador (Buenos Aires, va-. iss.). - c Average non-tariff fee on imports including various fees for special funds. Data from Ministry of Economy, Secretariat of Commerce. - d Sum of tariff plus fees. - e Difference between rate of protection and implied tariff. - fRate of protection over implied tariff. - AAproximated by inflating June 1977 implied tariff by chainge in domestic prices (WPI) and deflating by change in international prices (US producer prices) and by exchange rate devaluation. Note: For August 1979 a number of products were subject to temporary tariff cuts. The corresponding values are shown in parentheses. Source: Data obtained from Central Bank of Argentina. - For other datasee footnotesabove. - Ourestimates. 38 Jan Peter Wogart and Jose Silverio Marques References Berlinski, Julio, La Protecci6n Arancelaria de Actividades Seleccionadas de la Industria Manufacturera Argentina. Ministerio de Economfa, Buenos Aires, 1977, Blejer, Mario, and Arye Hilman, "A Proposition on Short-Run Departures from the Law-of- One-Price: Unanticipated Inflation, Relative-Price Dispersion, and Commodity Arbitrage". European Econoomic Review, Vol. 17, 1982, pp. 51-60. Central Bank of Argentine, Annual Report 1978. Buenos Aires 1979, Corbo, Vittorio, "Inflacion en una Economia Abierta: El Cas" de Chile". Cuadernos de Econoinfa, Vol. 56, Santiago de Chile, April 1982, pp. 5-15. Fernandez, Roque, and Carlos Rodriguez (Eds.), Inflaci6n y Estabilidad. Buenos Aires 1982. Harberger, Arnold C., "The Chilean Economny in the 1970s: Crisis, Stabilizatic-, Reform". In: Karl Brunner and Allan H. Meltzer (Eds.), Economic Policy in a World of Change. Carnegie-Rochester Conference Series on Public Policy, Vol. 17, Amsterdam 1982, pp. 115-152. Krueger, Anne O., "Interactions Between Inflation and Trade Regime Objectives in Stabiliza- tion Programs". In: William R. Cline and Sidney Weintraub (Eds.), Econiomic Stabilization itn Devielopinig Cotuntries. Washington 1981. pp. 83-114. McKinnon, Ronald' I., Foreign Exchlanige Policy and Economic Libe,7alization in LDCs. Paper presented at the Conference oni Financial Policies in Small Open Economies, Santiago de Chile, January 21-22, 1980, unpubl. Ministry of Economy, Institute of National Statistics and Census (INDEC), Monthly Wholesale and Retail Pri'ce Indices, Buenos Aires 1977-1980. Ministry of Economy, Treasury and Finance, Economic Report, Statistical Review. Buenos Aires 1981. Nogues, Julio [1983 a), Politica Comercial y Cambiaria: Una Inteipretaci6n de la Ex- periencia Argentina durante 1976-1981. Banco Central de la Repdblica, Serie de Estudios Tecnicos, No. 52, Buenos Aires 1983. - [1983 b), Trade Policy Decision Mechanism in a Sectoralized and Overvalued Exchange Rate Economy: The Case of Argentina. Washington 1983, mimeo. Officer, Lawrence H., "The Purchasing-Power-Parity Theory of Exchange Rates: A Review Article". IMF Staff Papers, Vol. 23, 1976, pp. 1-60. Williamson, John (Ed.), Exchange Rate Rules: The Theory, Performanice, and Prospects of the Crawling Peg. New York 1981. Wogart, Jan Peter, "Combining Price Stabilization with Trade and Financial Liberalization Policies: The Argentine Experience,1976-1981". Journal of Inter-American Studies and World Affairs,Vol. 25, 1983, pp. 445-476. * e * Zusammenfassung: Handelsliberalisierung, Zollredundanz und Inflation: Eine auf Argentinien angewandte methodologische Untersuchung. - Der Hauptzweck dieser Arbeit besteht darin, einen einfachen Rahmen fur die Analyse der Auswirkungen verschiedener MaRnahmen der Importliberalisierung auf die Wettbewerbsfahigkeit des gewerblichen Sektors Liberalization, Tariff Redundancy and Inflation 39 zu enitwickeln. Im Fall von Argentinien wird gezeigt, daf3 das Hauptinstrument zur Beseitioung der Zollredundanz die Wechselkurspolitik der Regierung war. Zollsenkungen waren von zweitrangiger Bedeutung. Die Zollredundanz scheint bis Anfang 1979 beseitigt gewesen zu sein, zu einer Zeit, in der die Behorden beganneni, diskriminierende Zollsenkungen vorzuneh- men. Aus der Redundanzanalyse ergeben sich Hinweise auf das Ausmal der moglichen Abschwachung der Preissteigerungsrate, die bei langfristiger Konvergenz der in- und auslandi- schen Preise erwartet werden kann. Konvergenzberechnungen, die auf der Kaufkraftparitaten- these basieren, konnen anscheinend nur dann korrekt verwendet werden, wenn die Preise einzelner Produkte auf den in- und ausldndischen Mar3rten verglichen werden. Die dargestell- ten Methoden kbnnen zwar verbessert werden, aber die wichtigsten Folgerungen fur die Politik diirften sich bereits aus der durchgefihrten Analyse klar ergeben. R6sum6: La liberalisation du commerce, 1'exc6dent tarifaire, et l'inflation: une explora- tion mdthodologique appliquee a l'Argentine. - Le but principal de cet article est presenter un cadre simple pour analyser l'impacte des plusieurs mesures de lib6ralisation d'importation sur la capacitM de concurrence potentielle du secteur industriel. Pour PArgentine, les auteurs demontrent que l'instrunent clef pour eliminer 1'excedent tarifaire etait la politique de taux de change des autorit6s. Les reductions des tarifs externes etaient moins importantes. 11 semble clair que les autorites avaient elimine l'excedent tarifaire aut d6but de 1979, au moment ou ils comnenqaient A r6duire les tarifs d'une maniere discriminatoire. L'analyse de l'excedent indique la mesure possible de la deceleration de prix qui peut etre attendue sous la condition d'une convergence de prix a long terme. Actuellement il paraft que les calculs de convergence qui basent sur la these de PPA peuvent etre appliques correctement seulement si les prix des biens individuels sur les marches internationaux et locaux sont compares. En effet la m6thodologie presentee ici peut etre perfectionnee, mais cette analyse devrait d6jA avoir montr6 les principales implications politiques. Resumen: Liberalizaci6n del comercio, redundancia tarifaria e ilflaci6n: una explora- ci6n metodol6gica aplicada a la Argentina. - El prop6sito principal de este articulo es presentar un marco simple para analizar el impacto de varias medidas de liberalizaci6n de importaciones sobre la competitividad potencial del sector industrial. En el caso de Argentina se demuestra que el instrumento clave al eliminar la redundancia tarifaria fue la politica cambiaria de las autoridades. Las reducciones en las tarifas externas fueron de importancia secundaria. Parece claro que la redundancia tarifaria habfa sido eliminada ya a principios de 1979, en una 6poca en que las autoridades comenzaron a aplicar reducciones tarifarias discriminatorias.- El anAlisis de redundancia indica el posible monte de desaceleraci6n de precios que puede esperarse bajo una convergencia de precios de largo plazo. En verdad pareciera que los calculos de convergencia basados en la tesis PPP pueden ser utilizados correctamente solo cuando se comparan precios de productos individuales en los mercados internacional y domestico. La metodologia presentada aquf puede ser refinada de varias maneras, pero las principales implicaciones de polftica deberian quedar claras de acuerdo al analisis precedente. No. 297. Sweder van Wijnbergen, "The 'Dutch Disease': A Disease after All?" The Economic Journal No. 298. Arne Drud and Wafik M. Grais, "Macroeconomic Adjustment in Thailand: Demand Management and Supply Conditions," Journal of Policy Modeling No. 299. 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Steel and Yasuoki Takagi, "Small Enterprise Development and the Employment-Output Trade-Off," Oxford Ecotnomic Papers No. 306. Oli Havrylyshyn and Engin Civan, "Intra-Industry Trade and the Stage of Develop- ment: A Regression Analysis of Industrial and Developing Countries," Intra-Industry Trade, Fmpirical and Methodological Aspects No. 307. Mateen Thobani, "A Nested Logit Model of Travel Mode to Work and Auto Ownership," Journal of Urban Economics No. 308. Johannes Bisschop and Alexander Meeraus, "On the Development of a General Algebraic Modeling System in a Strategic Planning Environment," Mathematical Programming Study No. 309. Reynaldo Martorell, Joanne Leslie, and Peter R. Moock, "Characteristics and Deter- minants of Child Nutritional Status in Nepal," The American Jourtal of Clinical Nutition No. 310. Robert H. Litzenberger and Jacques Rolfo, "An Intemational Study of Tax Effects on Government Bonds," The Journal of Finance No. 311. Jere R. Behrman and Nancy Birdsall," The Quality of Schooling: Quantity Alone is Misleading,' American Economic Review No. 312. Bela Balassa, 'Adjustment Policies in Developing Countries: A Reassessment," World Development No. 3I3. Keith Marsden, "Services for Small Firmns: The Roles of Government Programmes and Market Networks in Thailand," International Labour Revieuw No. 314. Gunter Schramm, "The Changing World of Natural Gas Utilization," Natural Resouirces Journal No. 315. Bela Balassa and Carol Balassa, "Industrial Protection in the Developed Countries," T7he AhMrld Economy No. 316. Nancy Birdsall and Jere R. Behrman, "Does Geographical Aggregation Cause Overestimates of the Returns to Schooling?" Oxford Bulletin of Economics and Statistics Issues of the World Bank Reprint Series are available free of charge from the address on the bottom of the back cover.