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GTAP Resource #3504

"Services Liberalization in Preferential Trade Arrangements: The Case of Kenya"
by Tarr, David G. and Edward J. Balistreri

Given the inclusion of commitments to foreign investors in services in modern FTA agreements negotiated with the EU, the US and in some other agreements and the evidence that FDI in services increases domestic productivity, economists need to be able to assess the impact of commitments to foreign investors as part of their advice to governments regarding preferential trade agreements. We develop a small open economy model framework for Kenya to do this analysis; crucially we incorporate the Dixit-Stiglitz-Ethier mechanism of endogenous productivity gains from additional varieties of imperfectly produced goods and services.
Preferential liberalization of services will lead to a gain of varieties from the partner countries (with resulting productivity increase), but a loss of varieties from excluded countries; the lost varieties result in lost productivity. We simulate examples of cases where there is a loss of welfare due to the loss of varieties and show how key elasticities in the model influence the result. That is, we show that in this monopolistic competition framework, there is an analogy to trade diversion in goods whereby preferential commitments in services could be immizerising? We also show how rent capture impacts the results.
Based on econometric evidence, our model allows for differentiated rates of technological spillover by region and product. Consequently, the estimated gains from a preferential agreement with the EU will yield larger gains for Kenya than a preferential agreement with the African region.
We devote considerable attention to the sensitivity of our results to uncertainty in the parameters. Regarding Kenya’s preferential arrangement with the Africa region, we find, from the systematic sensitivity analysis, that there is a 9.5 chance that Kenya would lose. If Kenyans are assumed to capture the rents form barriers in services, then the mean estimate is that Kenya would lose.

Resource Details (Export Citation) GTAP Keywords
Category: 2011 Conference Paper
Status: Published
By/In: Presented at the 14th Annual Conference on Global Economic Analysis, Venice, Italy
Date: 2011
Created: Tarr, D. (4/2/2011)
Updated: Tarr, D. (4/22/2011)
Visits: 1,579
- Preferential trading arrangements
- Africa (East)

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