Trade Liberalization and Foreign Direct Investment: An Applied General Equilibrium Model for Costa Rica

CSGR Working Paper No. 26/99

33 Pages Posted: 19 Oct 1999

See all articles by Lisandro Abrego

Lisandro Abrego

International Monetary Fund (IMF)

Date Written: April 1999

Abstract

This paper quantifies the welfare impact of unilateral trade liberalization and computes the optimal tariff structure for Costa Rica in the presence of trade-policy-induced international capital flows and foreign capital taxation. For this, an applied general equilibrium model integrating trade, capital flows and international capital income taxation is used. The model has been calibrated to a 1990-91 data set for the economies of Costa Rica and a group of OECD countries. In the model, foreign capital income is taxed by host countries and the tax-credit system operates in foreign investors home countries. Results for Costa Rica show that complete trade liberalization ends up being welfare-reducing, as it leads to an outflow of capital and loss of tax revenue which more than offset the efficiency gains from an enhanced resource allocation. The optimal tariff structure for the Costa Rican economy turns out to be a mixture of import tariffs and subsidies, though of a relatively small level.

JEL Classification: F13, F21, H20, O54

Suggested Citation

Abrego, Lisandro, Trade Liberalization and Foreign Direct Investment: An Applied General Equilibrium Model for Costa Rica (April 1999). CSGR Working Paper No. 26/99, Available at SSRN: https://ssrn.com/abstract=165793 or http://dx.doi.org/10.2139/ssrn.165793

Lisandro Abrego (Contact Author)

International Monetary Fund (IMF) ( email )

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