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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

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.

Suggested Citation

  • Sebastian Edwards & Sweder van Wijnbergen, 1983. "The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios," NBER Working Papers 1245, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1245
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    1. Brecher, Richard A. & Bhagwati, Jagdish N., 1982. "Immiserizing transfers from abroad," Journal of International Economics, Elsevier, vol. 13(3-4), pages 353-364, November.
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    4. 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.
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    Cited by:

    1. C. Martinelli & M. Tommasi, 1997. "Sequencing of Economic Reforms in the Presence of Political Constraints," Economics and Politics, Wiley Blackwell, vol. 9(2), pages 115-131, July.
    2. Sugeeth Patabendige & Chathuri Senarath, 2015. "Financial Liberalization: A Fourth Generation Thought," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 9(3), pages 73-82.
    3. Rama, Martin, 1993. "How labor markets and imperfect competition affect tariff policy," Policy Research Working Paper Series 1149, The World Bank.
    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. Pinto, Brian, 1988. "Black market premia, exchange rate unification, and inflation in sub-Saharan Africa," Policy Research Working Paper Series 37, The World Bank.
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    8. Cesar Martinelli, 2001. "Essays on Political Economy of Political Reform," Levine's Working Paper Archive 625018000000000135, David K. Levine.
    9. 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.

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