Trade reform in the partially liberalized economy of Turkey

THE WORLD BANK ECONOMIC REVIEW, VOL. 7, NO. 2: 191-217 Nsi t0pY MAY iqq3 Trade Reform in the Partially Liberalized Economy of Turkey Glenn W. Harrison, Thomas F. Rutherford, and David G. Tarr Recent reforms in trade policy in Turkey have produced a foreign trade regime that exhibits very little antiexport bias on average. A quantitative, multisectoral general equilibrium model of the Turkish economy shows that piecemeal trade policy reform, based on first-best rationales that are appropriate for highly distorted economies, would not now be appropriate. Further tariff reductions must be coordinated with export subsidy reductions to attain significant welfare benefits. The dispersion of dis- tortions, especially export subsidies, is more important than their level. A policy of harmonizing tariffs to the common external tariff of the European Community has virtually no effect on welfare. Turkey undertook a major liberalization of trade policies in the 1980s. Import quotas have become virtually nonexistent, the Turkish lira has been made con- vertible, and tariffs have generally been lowered so that the average nominal tariff rate is less than 10 percent. Given these changes and remaining export subsidies, Turkey has, on average, removed the antiexport bias from its external incentive regime. The impact on Turkey of its import-substitution trade policies in the 1970s and of its trade liberalization in the early 1980s has been the subject of several earlier studies, notably Baysan (1984); Baysan and Blitzer (1988, 1991); Rodrik (1988b); and Grais, de Melo, and Urata (1986). Although few analysts object to the reduction in import barriers and the real exchange rate depreciation as an aid to exporters, the effectiveness of more direct export incentives has been ques- tioned by Milanovic (1986), Rodrik (1988a), and Arslan and van Wijnbergen (1990). The welfare effects of either the direct or indirect incentives, however, have not been estimated. Starting with the relatively liberal trade regime of Turkey in the late 1980s, we use a 40-sector computable general equilibrium model to consider several fur- Glenn W. Harrison is in the Department of Economics, College of Business Administration, at the University of South Carolina; Thomas E Rutherford is in the Department of Economics at the University of Colorado at Boulder; and David G. Tarr is in the Policy and Research Department in the World Bank. This study is part of the World Bank's research on "The Impact of EC 1992 and Trade Integration in Selected Mediterranean Countries,' supported under grant RPO 67564. The authors would like to thank Deborah Bateman, Marylou Uy, Omer Karasapan, and Michael Klein for data and helpful comments and . two referees for their suggestions.