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The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios

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  • Sebastian Edwards

    (UCLA)

  • Sweder Van Wijnbergen

    (Development Research Department)

Abstract

This paper deals with the dynamics of trade and capital account liberalization in a developing country. The welfare consequences of trade and capital account liberalization under alternative sequencing scenarios are investigated. We draw on standard trade theory results to show that the opening of the capital account in the presence of trade distortions may be welfare reducing if foreign borrowing is used to increase investment. However we demonstrate that this welfare reducing effect of opening the capital account will not occur if shadow prices are used to guide investment decisions. It is then shown that if capital market restrictions fall disproportionally on investment (as opposed to consumption) a gradual reduction of import tariffs is superior to an abrupt trade liberalization.

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 313.

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Date of creation: 01 Nov 1983
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Handle: RePEc:cla:uclawp:313

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Web page: http://www.econ.ucla.edu/

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  1. Bertrand, T. J. & Flatters, F., 1971. "Tariffs, capital accumulation and immiserizing growth," Journal of International Economics, Elsevier, vol. 1(4), pages 453-460, November.
  2. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January.
  3. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
  4. Brecher, Richard A. & Bhagwati, Jagdish N., 1982. "Immiserizing transfers from abroad," Journal of International Economics, Elsevier, vol. 13(3-4), pages 353-364, November.
  5. Balassa, Bela, 1982. "Disequilibrium analysis in developing economies: An overview," World Development, Elsevier, vol. 10(12), pages 1027-1038, December.
  6. Sebastian Edwards, 1983. "The Order of Liberalization of the Current and Capital Accounts of the Balance of Payments: A Survey of the Major Issues," UCLA Economics Working Papers 310, UCLA Department of Economics.
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Cited by:
  1. Cesar Martinelli & Mariano Tommasi, 1993. "Sequencing of Economic Reforms in the Presence of Political Constraints," UCLA Economics Working Papers 701, UCLA Department of Economics.
  2. Kenneth A. Froot, 1989. "Credibility, Real Interest Rates, and the Optimal Speed of Trade Liberalization," NBER Working Papers 2358, National Bureau of Economic Research, Inc.
  3. Van Wijnbergen, S., 1991. "Trade Reform, Policy Uncertainty and the Current Account : A Non-Expected Utility Approach," Papers 9148, Tilburg - Center for Economic Research.
  4. Addison T & Demery L, 1986. "Impact of liberalisation on growth and equity," ILO Working Papers 250014, International Labour Organization.
  5. Rama, Martin, 1993. "How labor markets and imperfect competition affect tariff policy," Policy Research Working Paper Series 1149, The World Bank.
  6. Pinto, Brian, 1988. "Black market premia, exchange rate unification, and inflation in sub-Saharan Africa," Policy Research Working Paper Series 37, The World Bank.
  7. Sebastian Edwards, 1992. "Sequencing and Welfare: Labor Markets and Agriculture," NBER Working Papers 4095, National Bureau of Economic Research, Inc.
  8. Cesar Martinelli, 2001. "Essays on Political Economy of Political Reform," Levine's Working Paper Archive 625018000000000135, David K. Levine.

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