Theme/Relevant Ministry:

TAX POLICY:
M/o Finance; FBR

Project Brief:

This paper examines the impact of political influence on trade protection in Pakistan. Using the classic Grossman-Helpman model with an innovative dataset on political influence and trade protectionism, it examines determinants of trade policy. We use a granular dataset on political connections including trade associations, parliamentarians and their business interests, and politically powerful businesses. This ‘political connections’ dataset is combined with data on tariffs, non-tariff measures, and regulatory duties in Pakistan to form a complete picture of trade policy. We extend the methodology used in the Grossman-Helpman literature by using a synthetic control model to construct the main instruments used in estimating the parameters in the Grossman-Helpman model.

Our empirical analysis is focused on two areas of enquiry. Firstly, we probe whether special interest groups represented by strong business lobbies or politically connected firms were able to secure higher levels of non-tariff protection in the wake of the 2013 trade policy shock. Our second objective is to estimate a structural political economy model of trade protection that accounts for government-industry interaction (Grossman and Helpman, 1992). This allows us to take a broader sweep on the political economy determinants of overall trade protection using a well-established structural model.

This study is the first of its kind in the Pakistani context, where both cronyism and trade policy have emerged as key markers of public policy debates but where rigorous empirical research is seriously lacking. Beyond its relevance for Pakistan, our research contributes to the literature that studies the domestic political foundations of trade policy. Our contribution is to go beyond tariffs to include a variety of other trade policy instruments, including non-tariff measures and regulatory duties. A second point of departure from prior work is that we will develop a more precise and direct proxy of politically connected sectors that is based on more granular information on the presence, number, and type of political connections.

Public Policy Relevance:

By using the information on three major trade policy instruments in Pakistan (tariffs, non-tariff measures, and regulatory duties), the study helps the trade policy by providing knowledge of the deep drivers of non-tariff measures and their impact on exports.

Status:
COMPLETED 100%

Final Research Report, Policy Brief and Journal article can be downloaded from the link: https://pide.org.pk/rasta/publications-cgp-1-0/