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The Rush to Free Trade in the Developing World: Why So Late? Why Now? Will it Last?

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  • Dani Rodrik

Abstract

This paper asks why developing country policymakers have been so reluctant to undertake trade reform until the 1980s, and why many of them have embraced open trade policies so wholeheartedly since then. To answer these questions, the paper develops a heuristic index of the "political cost-benefit ratio" (PCBR) of policy reform. The PCBR is a measure of the amount of redistribution of income generated for every dollar of efficiency gain achieved by reform. Judged by this index, trade reform performs very poorly: liberalization typically leads to five dollars of income being reshuffled within the economy for every dollar of net efficiency gain. However, when the liberalization is undertaken at a point of deep macroeconomic crisis and in conjunction with stabilization policies, the value of the PCBR index falls dramatically. This explains why trade reform is politically so difficult in normal times, and why times of crisis provide an opportune moment for undertaking structural reforms. The paper concludes by evaluating the sustainability of the reforms of the 1980s.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3947.

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Date of creation: Jan 1992
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Publication status: published as S. Haggard and S. Webb eds., "Voting for Reform: Democracy, Political Liberalization, and Economic Adjustment" New York, Oxford University Press, 1994. pp. 61-88
Handle: RePEc:nbr:nberwo:3947

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  1. Arvind Panagariya & Dani Rodrik, 1991. "Political-Economy Arguments for a Uniform Tariff," NBER Working Papers 3661, National Bureau of Economic Research, Inc.
  2. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  3. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 600-621, June.
  4. Drazen, Allan & Grilli, Vittorio, 1993. "The Benefit of Crises for Economic Reforms," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 598-607, June.
  5. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, American Economic Association, vol. 64(3), pages 291-303, June.
  6. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers, Tel Aviv - the Sackler Institute of Economic Studies 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  7. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 81(5), pages 1146-55, December.
  8. Rodrik, Dani, 1989. "Promises, Promises: Credible Policy Reform via Signalling," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(397), pages 756-72, September.
  9. John Whalley, 1989. "Recent Trade Liberalization in the Developing World: What is Behind It, and Where is it Headed?," NBER Working Papers 3057, National Bureau of Economic Research, Inc.
  10. Rodnik, Dani, 1992. "Conceptual issues in the design of trade policy for industrialization," World Development, Elsevier, Elsevier, vol. 20(3), pages 309-320, March.
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