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- Title
Free Trade Zones and Outstanding Debt+.
- Authors
Datta Chaudhuri, Tamal; Nath, Smita
- Abstract
The existing literature has analyzed the effects of different policies on the debt-servicing problem of the developing countries and these policies range from depreciation of the nominal exchange rate to the creation of an export oriented trade regime. In a dynamic setting, this paper analyzes the effects of yet another policy measure, namely, creation of Free Trade Zones (FTZ). The analysis shows that in the presence of a demand constrained industrial sector and a supply constrained agricultural sector, if inputs are substitutes in the FTZ, then production incentives to the FTZ through reduction in tariff rate on the imported input used by this zone (while maintaining the rate for the rest of the economy) expand output of the FTZ, output and employment of the traditional sector and reduce the level of outstanding debt in the short-run. However, in the long-run, the effect of giving additional incentives to the FTZ on the level of outstanding debt crucially depends on one additional factor, namely, the responsiveness of fiscal deficit to the level of outstanding debt. Thus, neither in the short-run, nor in the long-run, does the creation of FTZ necessarily increases the output and employment and reduces the level of outstanding debt. The paper provides a framework for analysis which enables one to identify the different ways in which the economy would respond to such a policy.
- Subjects
FREE ports &; zones; FREE trade; DEBT; DEVELOPING countries; DEPRECIATION; FINANCE
- Publication
ICFAI Journal of International Business, 2009, Vol 4, Issue 1, p7
- ISSN
0973-3752
- Publication type
Article