Liberalisation Reforms and Misallocation: The Role of Political Institutions

To what extent did the liberalisation policies of the 1990s and 2000s help address the misallocation of factors across sectors in developing countries? This paper shows that while misallocation decreased during this period - particularly in countries with higher levels of misallocation in 1990 - this improvement cannot be explained by the liberalisation reforms implemented by respective governments. However, a more nuanced picture emerges for trade liberalisation. In countries which were sufficiently democratic, an increase in trade liberalisation decreased misallocation. This evidence also helps reconcile conflicting views on the success of liberalisation reforms by highlighting the importance of right political institutions for their success.