The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios
AbstractThis 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 InfoPaper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 313.
Date of creation: 01 Nov 1983
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Web page: http://www.econ.ucla.edu/
Other versions of this item:
- Sebastian Edwards & Sweder van Wijnbergen, 1986. "The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios," NBER Working Papers 1245, National Bureau of Economic Research, Inc.
- NEP-ALL-2001-06-08 (All new papers)
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