Working Paper No. 04-32
The last decade has witnessed significant influx of direct foreign investment in developing countries. The increased flow of foreign investment has contributed to the ability of developing countries to produce import competing manufactured goods by combining imported and domestically produced inputs. This situation has to some extent changed the comparative advantage of developing countries. Within the context of this development, this paper attempts to examine the effectiveness of devaluation and other import restricting polices. The paper argues that trade liberalization remains the most desirable policy. Specifically a cut in import and export duties are found to be beneficial both in the short-run and the long-run.