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The Small Country Assumption, Econometric Estimates and Policy Making: A Reassessment with Bangladesh's RMG Exports to the European Union

Mohammad Razzaque ()

Bangladesh Development Studies, 2004, vol. 30, issue 1-2, 1-34

Abstract: Most empirical studies on Bangladesh have found the price elasticity of demand for the country’s exports to be quite small – considerably lower than one (absolutely). These econometric estimates have a serious implicit implication in terms of challenging the policy of export promotion since in the presence of such highly price inelastic demand the optimal trade policy option will be to impose taxes on exports rather than to provide incentives. It is also difficult to perceive why the country should have such a strong market power, as reflected in the low price elasticity estimates, when close substitutes for its export items are widely available in international markets. By empirically estimating a theoretical model, this paper demonstrates that the demand elasticity for exports of RMG to the European Union (EU) is much higher than the conventional estimates. This evidence suggests that Bangladesh may be considered as a “small” country, which is compatible with the policy of export promotion and trade liberalization.

Keywords: Policy Making; Bangladeshs RMG Exports; European Union (search for similar items in EconPapers)
JEL-codes: A10 (search for similar items in EconPapers)
Date: 2004
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