Effective Protection Analysis

Abstract

Chapters 2 and 3 focused on the range of instruments of intervention available to the policy maker which go under the heading of ‘trade and industrial policy’. In Chapter 4 we extended this analysis to the estimation of the nominal protection. Our interest there lay in the measurement of nominal tariffs and the estimation of the tariff equivalents of non-tariff barriers. As we argued in Chapter 4, the measurement of nominal protection can serve a very useful purpose. There are important respects however in which it can also be misleading. In particular it disregards the fact that the degree of protection conferred on an activity will depend not only on any interventions which affect the price of the final good produced, but also by any interventions which affect the price paid for inputs into the production process. This is a major shortcoming. Effective protection analysis offers a framework designed to overcome that shortcoming. This chapter is directed at outlining and explaining the effective protection method. Section 5.2 explains the concept formally. In Section 5.3 we explore a number of possible extensions to the basic model. Although, as we shall see, effective protection is in theoretical terms a very precise concept, there are a range of complications which arise when we attempt to estimate it empirically. These are discussed in Section 5.4. Section 5.5 continues by reviewing the evidence on effective protection in developing countries.