(Krueger 1974). Loan conditionality by international financial institutions, which required borrowing countries to practice liberal trade policies, probably helped only a little since nonreforming governments were rarely sanctioned. Probably the biggest influence on other developing countries’ unilate ral decisions to liberalize their trade policies was the spectacular economic growth performance from the late 1960s of the East Asian economies (including China from the late 1970s), which adopted an export-oriented trade strategy.

How did development economists get it so wrong? Krueger (1997) suggests one reason is the misapplication of trade theory: by thinking of the two-factor, two-good trade model instead of a three-factor, many-good model, the possibility was not envisaged of economies becoming competitive suppliers of first unskilled labour intensive products and gradually more capital intensive ones (as in Krueger 1977 and Leamer 1987, building on Jones 1971). Another reason is that their premises were not based on facts. Schultz (1964), for example, debunked the premises that farmers are not price responsive and that the marginal product of farm labour is zero in developing countries; and his later worked stressed that for economic growth, investments are needed also in human, not just physical, capital. A third possible reason was the absence until more recently of convincing quantitative policy analysis to show the cost and other consequences of protectionist policies (see next section).

# **V.  QUANTIFYING TRADE DISTORTIONS AND THEIR EFFECTS**<sup>**12**</sup>

The international economics profession is no longer in its infancy in terms of measuring the extent and effects of trade policy distortions, but its rapid progress has only been recent and it still has some way to go. Extensive reviews of the literature can be found in Corden (1975) and Feenstra (1995), so all that is attempted here is to provide a sense of the distance the profession has travelled from a trade policy practitioner’s viewpoint since the 1950s.

# **_Measuring the extent of protection_**

Trade policy distortions can be due to taxes or subsidies on imports or exports, or quantitative restrictions on trade. Trade can be also distorted by interventions in foreign exchange markets, and of course by myriad domestic policy interventions such as output, input and factor taxes and subsidies. But over recent centuries perhaps the most common trade distortionary measure has been the import tariff.

To measure the extent of a country’s aggregate tariff protection against import competition, attention focused initially on developing tariff level indexes (League of Nations 1927). One of the problems with any aggregate measure, however, is that it cannot serve equally well all purposes simultaneously. Domestic uses for the index could be as an indication of the aggregate degree of resource re-allocation towards protected industries and/or of taxation of consumption of importables, or of foregone welfare gains from trade. International uses such as by trading partners could be as an indication of the degree of restriction on import market access.

In terms of indicators of resource re-allocation, substantial progress followed a paper on Canada’s protection by Barber (1955), from which Corden (1963) developed and applied to Australia the concept of the effective rate of protection (ERP). The distinction between nominal and effective protection is that the former measures the extent to which the tariff raises the domestic price of a producer’s output whereas the latter indicates the extent to

> 12 This section draws on Anderson (2003a).

11