factor and product markets to function freely, and (c) maintain macroeconomic and political stability (Rodrik 2003; Wacziarg and Welch 2003; Baldwin 2004; Chang, Kaltani and Loayza 2005).

Perhaps the best single paper that brings these ideas together using a numerical open economy growth model is that by Rutherford and Tarr (2002). Their model allows for product variety, imperfect competition, economies of scale and international capital flows. It is dynamic, so the model can trace out an adjustment path to trade reform; and it is stochastic in that it draws randomly from uniform probability distributions for eight key parameters of the model. They simulate a halving of the only policy intervention (a 20 percent tariff on imports) and, in doing so, fully replace the government’s lost tariff revenue with a lump-sum tax. That modest trade reform produces a welfare increase (in terms of Hicksian equivalent variation) of 10.6 percent of the present value of consumption in their central model. Systematic sensitivity analysis with 34,000 simulations showed that there is virtually no chance of a welfare gain of less than 3 percent, and a 7 percent chance of a welfare gain larger than 18 percent of consumption. Several modeling variants and sensitivity analysis on all the key parameters found that the welfare estimates for the same 10 percentage point tariff cut ranged up to 37 percent when international capital flows are allowed, and down to 4.7 percent when using the most inefficient replacement tax (a tax of capital). The latter result shows that even the very inefficient tax on capital is superior to the tariff as a revenue raiser. Increasing the size of the tariff cuts results in roughly proportional increases in the estimated welfare gains. Large welfare gains in the model arise because the economy benefits from increased varieties of foreign goods, which dominate the decrease in varieties of domestic goods. In order to assess the importance of variety gains, they then assume that one of the two sectors is subject to constant returns to scale and perfect competition (CRS/PC) – and find in that case that the additional varieties do not increase total factor productivity. Instead, a small welfare gain of about 0.5 percent of the present value of consumption emerges, which is of the same order of magnitude as in the many comparative static CRS/PC computable general equilibrium studies. Their results also illustrate the importance of complementary reforms to fully realize the potential gains from trade reform. In particular, with the ability to access international capital markets the gains are roughly tripled; and use of inefficient replacement taxes significantly reduce the gains. These combined results underscore the point that complementary macroeconomic, regulatory, and financial market reforms to allow capital flows and efficient alternate tax collection are crucial to realizing the potentially large gains from trade liberalization.

# **_Economic consequences of international migration_**

Half a century ago it was shown, using the simplest of trade models, that trade in products could be a perfect substitute for trade in capital and labour (Mundell 1957). But increasingly it has become apparent that trade in factors of production can complement trade in goods, in which case freeing both would yield greater gains (Markusen 1983). Indeed theory cannot predict whether that would result in factor trade increasing more or less than product trade (Michaely 2003), which suggests the greatest gains would come to those countries that open both. Certainly the two forces happened simultaneously in the latter nineteenth century in what might be considered the first modern wave of globalization. And if product trade liberalization runs into 8