Political-Economic Problems in Trade Capacity Building
Review of International Organizations, Vol. 4, No. 4, pp. 329-359, 2009
Posted: 6 May 2010
Date Written: December 1, 2009
Abstract
Theoretically, trade capacity building should contribute to export-led growth and support liberal economic policies. Unfortunately, it often fails to meet this ideal due to resource misallocation, misplaced focus on existing obligations, and donor-driven implementation. This article presents a formal theory of political-economic problems in trade capacity building. I analyze trade liberalization as a repeated game with imperfect public monitoring between a developed and developing country. Modeling trade capacity building as an investment by the developed country, I show that it suffers from two problems. First, the need to enforce trade liberalization drives resource misallocation: costly projects are implemented only to build commitment capacity while others are not implemented because they encourage protectionism. Second, donor interests distort trade capacity building. Counter-intuitively, if the donor can seek compensation from the recipient when it violates international trade law, it sometimes refuses to invest in low-cost trade capacity building while funding projects that hurt the recipient.
Keywords: international trade, capacity building, development, game theory
JEL Classification: C7, F10, F13, O19
Suggested Citation: Suggested Citation