Trade reform and the small country assumption

Abstract

Introduction This paper is concerned with the consequences of policy-conditional adjustment assistance being applied simultaneously to several developing countries. Is there a contradiction between individual actions and group outcomes, often referred to as the fallacy of composition in policy discussions? How important is it likely to be empirically? If it is empirically relevant, how can adjustment policies best be adjusted to take weaknesses in the small country assumption into account? Trade and protectionism The contrast between the trade policies of developing countries and those of OECD member countries is increasingly stark. Whereas a growing number of developing countries are engaged in fundamental trade reform, OECD protectionism has increased in the 1980s. The extent of protection is particularly evident in agriculture, where the costs of distortions in 1990 reached a record $300bn. Many developing countries have not embraced trade liberalisation willingly. The burden of debt has nevertheless constrained their choice and – with the withering of commercial bank lending – increased their reliance on multilateral and bilateral agencies whose lending has increasingly been associated with reform conditionality. The extent of outside pressure should not, however, be exaggerated: developing countries are learning some of the lessons of their failed development (and those of Eastern Europe), and are now a more receptive audience to the benefits of freer trade. Nevertheless, strong reservations remain. This paper focuses on a key concern for the tropical product exporters: the small country assumption, and the possibility of a fallacy of composition in policy advice.

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