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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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Suggested Citation

  • Sebastian Edwards & Sweder Van Wijnbergen, 1983. "The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios," UCLA Economics Working Papers 313, UCLA Department of Economics.
  • Handle: RePEc:cla:uclawp:313
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    File URL: http://www.econ.ucla.edu/workingpapers/wp313.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Bertrand, T. J. & Flatters, F., 1971. "Tariffs, capital accumulation and immiserizing growth," Journal of International Economics, Elsevier, vol. 1(4), pages 453-460, November.
    3. 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.
    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. 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.
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    Citations

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    Cited by:

    1. Froot, Kenneth A., 1988. "Credibility, real interest rates, and the optimal speed of trade liberalization," Journal of International Economics, Elsevier, vol. 25(1-2), pages 71-93, August.
    2. Pinto, Brian, 1988. "Black market premia, exchange rate unification, and inflation in sub-Saharan Africa," Policy Research Working Paper Series 37, The World Bank.
    3. repec:ilo:ilowps:250014 is not listed on IDEAS
    4. Sebastian Edwards, 1992. "Sequencing and Welfare: Labor Markets and Agriculture," NBER Working Papers 4095, National Bureau of Economic Research, Inc.
    5. Addison T. & Demery L., 1986. "Impact of liberalisation on growth and equity," ILO Working Papers 992500143402676, International Labour Organization.
    6. Cesar Martinelli & Mariano Tommasi, 1993. "Sequencing of Economic Reforms in the Presence of Political Constraints," UCLA Economics Working Papers 701, UCLA Department of Economics.
    7. Rama, Martin, 1993. "How labor markets and imperfect competition affect tariff policy," Policy Research Working Paper Series 1149, The World Bank.
    8. Cesar Martinelli, 2001. "Essays on Political Economy of Political Reform," Levine's Working Paper Archive 625018000000000135, David K. Levine.

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