Medvedev, Denis2012-05-292012-05-292008-02https://hdl.handle.net/10986/6574This paper quantifies the likely benefits of trade and investment liberalization in a small, poor, open economy, using the accession of Honduras to the Dominican Republic-Central American Free Trade Agreement as a case study. The results show that bilateral trade liberalization with the United States is likely to have almost no effect on welfare in Honduras, while the reciprocal removal of protection vis-a-vis the rest of Central America would lead to significantly larger gains. Potential gains from increased net foreign direct investment inflows overwhelm those expected from trade reform alone, particularly if the new foreign direct investment generates productivity spillovers. However, if it is to replace Honduran investment rather than complement domestic capital formation, growth performance is unlikely to improve and may even suffer. The paper's results identify several areas for policy attention by Honduran policy makers to make the Dominican Republic-Central American Free Trade Agreement more development-friendly. These include carefully considering the budgetary implications of trade reform, widening social safety nets to counter the trends toward increasing income inequality, and sequencing the reforms to ensure a close alignment of Honduras' comparative advantage on the regional and global markets.CC BY 3.0 IGOADVERSE CONSEQUENCESADVERSE EFFECTSAGGREGATE INVESTMENTAGRICULTURAL COMMODITIESAGRICULTURAL PRODUCTSAGRICULTUREANNUAL GROWTHAPPARELAVERAGE TARIFFAVERAGE TARIFFSBALANCE OF PAYMENTBALANCE OF PAYMENTSBALANCE OF PAYMENTS CONSTRAINTBASE YEARBENCHMARKBILATERAL AGREEMENTBILATERAL TRADECAPACITY BUILDINGCAPITAL ACCUMULATIONCAPITAL FORMATIONCAPITAL INCOMECAPITAL INFLOWSCAPITAL STOCKCAPITAL STOCKSCENTRAL BANKCOMMODITY PRICECOMMON MARKETCOMPARATIVE ADVANTAGECONCESSIONSCONSTANT ELASTICITY OF SUBSTITUTIONCONSTANT ELASTICITY OF TRANSFORMATIONCONSTANT RETURNS TO SCALECONSUMER PREFERENCESCONSUMER SURPLUSCONSUMERSCONSUMPTION BASKETCONSUMPTION LEVELSCURRENT ACCOUNTCURRENT ACCOUNT BALANCEDEBTDEBT SERVICEDEMAND CURVEDEMAND GROWTHDEMAND SHOCKSDEPENDENT VARIABLEDISPOSABLE INCOMEDISPOSABLE INCOMESDISPUTE SETTLEMENTDOMESTIC CONSUMPTIONDOMESTIC DEMANDDOMESTIC GOODSDOMESTIC PRICEDOMESTIC PRICESDOMESTIC PRODUCERSECONOMIC IMPLICATIONSELASTICITYELASTICITY OF SUBSTITUTIONEQUILIBRIAEXPANSION OF EXPORTSEXPENDITURE FUNCTIONEXPORT GROWTHEXPORT MARKETSEXPORT ORIENTATIONEXPORT PRICESEXPORT SHARESEXPORT SUPPLYEXPORT VOLUMEEXPORT VOLUMESEXPORTEREXPORTERSEXPORTSEXTERNAL DEBTEXTERNAL PROTECTIONFACTOR MARKETSFISCAL DEFICITFOOD PRICESFORECASTSFOREIGN CAPITALFOREIGN DEBTFOREIGN DIRECT INVESTMENTFREE ACCESSFREE TRADEFREE TRADE AGREEMENTFULL LIBERALIZATIONFULL TRADE LIBERALIZATIONGDPGDP PER CAPITAGENERAL EQUILIBRIUMGENERALIZED SYSTEM OF PREFERENCESGLOBAL DEMANDGLOBAL MARKETGLOBAL MARKETSGNPGOVERNMENT BONDSGROWTH PERFORMANCEGROWTH PROJECTIONSGROWTH RATEGROWTH RATESIMBALANCESIMPERFECT COMPETITIONIMPORTIMPORT COMPETITIONIMPORT CONTENTIMPORT DEMANDIMPORT PRICESIMPORT QUOTASIMPORT TARIFFSIMPORTSINCOMEINCOME ELASTICITIESINCOME ELASTICITYINCOME ELASTICITY OF DEMANDINCOME GROWTHINCREASING RETURNSINCREASING RETURNS TO SCALEINTERMEDIATE GOODSINTERMEDIATE INPUTSINTERNATIONAL CAPITAL FLOWSINTERNATIONAL FINANCIAL STATISTICSINTERNATIONAL TRADEINVENTORIESINVESTMENT CLIMATEINVESTMENT DEMANDINVESTMENT GOODSINVESTMENT INFLOWSINVESTMENT LIBERALIZATIONINVESTMENT SPENDINGLABOR FORCELABOR MARKETLABOR MARKET SEGMENTATIONLABOR MARKETSLIBERALIZATION OF TRADELOST TARIFF REVENUELOW TARIFFMACROECONOMIC EFFECTSMACROECONOMIC VARIABLESMARGINAL PROPENSITY TO SAVEMARKET ACCESSMARKET SHAREMONOPOLISTIC COMPETITIONMULTILATERAL LIBERALIZATIONMULTILATERAL TRADENATURAL RESOURCESNEOCLASSICAL MODELSOPEN ECONOMYOPTIMIZATIONPREFERENTIAL TRADEPRICE FLUCTUATIONSPRICE INDEXPRIVATE CAPITALPRIVATE CONSUMPTIONPRIVATE INVESTMENTPRODUCTIVITYPRODUCTIVITY GROWTHPROTECTION DATAPUBLIC DEBTPUBLIC EXPENDITUREPUBLIC INVESTMENTPUBLIC SPENDINGRATE OF GROWTHREAL EXCHANGE RATEREAL GDPREGULATORY FRAMEWORKSRELATIVE PRICERELATIVE PRICESREMITTANCEREMITTANCESSAFETY NETSSHORTFALLSUPPLY SIDETARIFF BARRIERSTARIFF DATATARIFF RATETARIFF RATESTARIFF REDUCTIONTARIFF REDUCTIONSTARIFF REVENUESTARIFFS ON IMPORTSTECHNICAL ASSISTANCETEXTILE TARIFFTOTAL DEBTTOTAL EXPORTSTOTAL FACTOR PRODUCTIVITYTOTAL IMPORTSTOTAL INVESTMENTTOTAL OUTPUTTRADE BARRIERSTRADE DIVERSIONTRADE FACILITATIONTRADE LIBERALIZATIONTRADE POLICYTRADE REFORMTRADING PARTNERTRADING PARTNERSTRANSITION MATRIXUNCERTAINTIESUNCERTAINTYUNEMPLOYMENTUNEMPLOYMENT RATEUNILATERAL LIBERALIZATIONUNSKILLED LABORUNSKILLED WORKERSURUGUAY ROUNDUTILITY FUNCTIONUTILITY FUNCTIONSVALUE ADDEDWAGE DIFFERENTIALSWAGESWEIGHTSWELFARE GAINSWORLD MARKETWORLD PRICEWORLD PRICESWTOZERO TARIFFWorld Bank10.1596/1813-9450-4537