V - Initial Evaluation of MFA Welfare Effects on Developing Countries

Summary

Most studies on the effects of the MFA on developing countries have focused on evaluating the rents gained by developing countries. Hamilton (1986a) measured the rents gained by Hong Kong using information on the value of that country's bidding quota. He found that in 1983 the quota rents gained by Hong Kong exports to the United States, the EC and the European Free Trade Association (EFTA) countries were $506.8 million. Hamilton also estimated that the rents gained for ASEAN countries in 1981 and 1982 (at 1982 prices) were $28.14, $21.14, and $19.95 million for Thailand, Indonesia and Malaysia respectively (Hamilton 1986a).

Another effect of the MFA that needs to be evaluated is the loss to developing countries of not being able to export in a free trade situation. This should be added to the efficiency loss and the dead weight loss in any measurement of the net welfare effects of the MFA.

A recent model for the clothing and textile trade, developed by Trela and Whalley (1988), concluded that developing countries are the losers. They suggested that if the MFA were abolished the MFA exporting countries would gain approximately $11 billion. Trela and Whalley's study assumed differentiated product groups.

To focus on the welfare effects of the MFA on developing countries, the “world” has been divided into three regions: MFA-importing countries (MFA-M), MFA-exporting countries (MFA-X) and the rest of the world (ROW). Some important assumptions are as follows:

1. there is only one aggregated product, clothing (SITC 84), that is, the product is homogeneous;

2. all excess demand and supply are log-linear.

Figure 5.1 is based on these three country groups. ES is an excess supply function of the MFA-X to both MFA-M and ROW. ED* and ED' are excess demand functions of MFA-M and ROW respectively, where EDED is the total excess demand function of the two regions. In a free trade situation, the equilibrium point where total excess demand equals excess supply is A, the world market price is Pf and the imports of MFA-M and ROW are PfA.