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

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Sebastian Edwards
Sweder van Wijnbergen

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1245.

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Date of creation: Jul 1986
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Handle: RePEc:nbr:nberwo:1245

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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. [Downloadable!] (restricted)
  2. Balassa, Bela, 1982. "Disequilibrium analysis in developing economies: An overview," World Development, Elsevier, vol. 10(12), pages 1027-1038, December. [Downloadable!] (restricted)
  3. 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. [Downloadable!]
  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. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
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  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. [Downloadable!]
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