Policy Distortions, Reserve Accumulation, and the Welfare Loss

In certain developing countries, the ambition of rapid growth has prompted governments to adopt many export-biased policy measures such as export subsidies, tax rebates, low interest loans, low tariffs on materials used in export goods, and in some cases the prohibition of domestic consumption of exportables. More often than not, the export-biased policies are coupled with severe tariffs on import goods. Another strange policy adopted by certain countries is the rapid accumulation of international reserves beyond a reasonable sum. In this note, the potential welfare losses from such policy measures are analyzed by a simple diagram.