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

Dani Rodrik

NBER Working Paper No. 3947
Issued in January 1992
NBER Program(s):International Trade and Investment, , International Finance and Macroeconomics

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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Document Object Identifier (DOI): 10.3386/w3947

Published: S. Haggard and S. Webb eds., "Voting for Reform: Democracy, Political Liberalization, and Economic Adjustment" New York, Oxford University Press, 1994. pp. 61-88

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