Equalizing the Cost of Success: Equitable Graduation Rules and the Generalized System of Preferences

Abstract

The developing countries which are beneficiaries of the GSP have reason to seek an ob jectiviely specified graduation rule to minimize the discretion of the U.S. government regard ing who graduates and when. Current rules based on per capita income, however, are not horizontally equitable across countries as they punish openness. We analyze this point in a stylized model of international trade and propose some alternative rules which may have some appeal to policy-makers in the U.S. and developing countries. The Generalized System of Preferences (GSP) was introduced by the U.S. in 1976 to provide for duty-free access from developing countries to the U.S. market. Some nineteen countries now have similar programs.1 The intent of the program is to foster economic development. Aid under the program takes an indirect form, via terms of trade improvement rather than direct transfers. The assistance is directed at developing countries. However, in the course of time as development takes place, countries change their status, from developing to developed.2 At that stage, the suc cessful country would no longer merit the aid provided by the GSP, and would graduate from the program. To facilitate graduation a rule specifying change in status is required. This paper is concerned with the determination of such rules. Whereas