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Vested Interests and the Political Economy

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Vested Interests and the Political Economy ofImport Tariff Setting in BrazilByMonica Arruda de AlmeidaIntroductionThe Grossman-Helpman modelImport elasticityFigure 1. - Patterns of Nominal Tariff Setting: 1987 vs. 1998Vested Interests and the Political Economy of Import Tariff Setting in Brazil By Monica Arruda de Almeida Department of Political Science University of California, Los Angeles [email protected] http://www.bol.ucla.edu/~marruda This paper is the first version of one of my dissertation’s chapters. Thus your comments and suggestions will be particularly appreciated. For the same reason, though, I would ask your discretion when citing this study, which is still a work in progress. Also, I would like to thank my advisor, professor Michael Lofchie, for his always-helpful comments and unceasing support. I am no less grateful to professors Kathy Bawn and Barbara Geddes for their valuable guidance throughout this study. My special thanks go to professor Marc-Andreas Muendler for unselfishly sharing his conversion systems of the Brazilian industrial classifications and other economic indicators. Prepared for delivery at the sixth annual Society for Comparative Research Graduate Student Retreat at the University of California, San Diego, May 14 – 15, 2004.2Abstract This study identifies and measures how industrial sectors have influenced trade policy in Brazil’s recent democratic phase. More specifically, I examine whether industrial sectoral strength functions as a predictor of import tariff rates. I use a version of the Grossman-Helpman’s (1994) “Protection for Sale” trade model in which industrial strength is proxied by a set of factors, including those originally specified by the G-H model – such as import-penetration and import-demand elasticities ratios – plus buyers concentration ratio. The G-H model has been widely acknowledged for its high explanatory power to a country’s trade policy. My findings indicate that the pattern of import tariffs in Brazil still reflect the government’s trade protectionist practices during the country’s import-substitution era. This is despite the fact that Brazilian import tariffs were greatly reduced across industrial sectors in the 1990s. In addition, I find that the model explains, on average, only 34% of the variance in Brazil’s import tariff rates. This result thus further corroborates the evidence that economic traits of individual industrial sectors have limited capability of explaining the political economy of import tariff setting in Brazil in recent years.3Introduction The early success of the Brazilian economic reforms during the 1990s, when the country was able to end years of hyperinflation and to launch its first significant trade liberalization program, has led many observers to believe that the Brazilian government has finally given up its state-interventionist policies for a pragmatic market based economic program. However, as one looks at Brazil’s import tariff rates, it becomes clear that, although the government has reduced import tariffs across industries, it has kept a pattern of protectionism that resembles that of during the country’s I.S.I. (Import-Substitution-Industrialization) program. The goal of this study is to estimate how much of Brazil’s import tariff setting practices during the country’s recent democratic phase can be explained by market forces, that is, by the relative strength and traits of its industrial sectors. This is an important question to address given Brazil’s historical pattern of political insulation from private pressures. To accomplish this task, I use a slightly different version of the Grossman-Helpman (G-H) 1994 trade model, which has been commonly praised for its explanatory power (e.g., Goldberg and Maggi 1999, Gawande and Bandyopadhyay 2000). In this study, industrial strength is proxied by three factors, including those originally specified by the G-H model – such as import-penetration and import-demand elasticities ratios – plus buyers concentration ratio. As mentioned earlier, import tariff is my dependent variable. Economic figures represent 48 industrial sectors that are aggregated according to Brazil’s Niv. 80 classification system (please see Table A1 in the appendix). My analysis reveals that the variables I test in the model not only have high significance, but they also all support the argument that the Brazilian government has still employed a great deal of discretion when setting import tariffs. Such discretion is exercised in a way that is not aimed at collecting tax revenues but rather at promoting import protection. This is despite the Brazilian4government considerably lowered import tariffs rates across industrial sectors in the 1990s. This finding is further corroborated by the fact that the economic variables I use in the model are able to explain only 34% of the variance in import tariffs in Brazil between 1986 and 1999. Therefore, the evidence points to the possibility that there are other political-institutional factors in play, which are still significantly influencing trade policies in Brazil even after the country’s latest trade liberalization efforts. This paper is divided in six sections, including introduction. In section 2, I describe the G-H model in detail, give an example of how it has been used in the trade literature, and contrast the G-H model’s assumptions, which derived from the economic-institutional environment in developed countries, to the “relaxed” assumptions that I make in my model so that I can properly interpret this study’s results in light of Brazil’s economic-institutional context. I present then my quantitative results in section 3, and lastly I summarize the main conclusions of this study and anticipate how other chapters of my dissertation will address some of the political-institutional problems not answered by this paper. The Grossman-Helpman model The reason why the G-H model has been so well received in the literature on the political economy of trade is because of its parsimony. That is, these scholars were able to pinpoint three variables that have had consistently very high explanatory power when it comes to explaining a country’s trade protectionist policy. This section explains conceptually the structure and assumptions of the G-H model.1 1 My hope is that this approach will be more instructive to social scientists who are not


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