Sequencing and Welfare: Labor Markets and Agriculture
Recent discussions on structural adjustment and market-oriented reforms in developing and Eastern European nations have addressed the issue of the appropriate sequencing of these reforms. Most of the traditional work on the subject has concluded that the preferred sequencing should include, as a first step, the opening up of the trade account. This "trade account first" literature, however, has been mostly macroeconomics in nature, without explicitly exploring the microeconomics and welfare consequences of alternative sequencing strategies. In this paper I develop a formal intertemporal model to investigate the welfare effects of different reform sequences. More specifically, I analyze whether the "trade account first" recommendation can be backed theoretically by welfare considerations. The analysis focuses on the role of labor market distortions and of the agricultural sector. I find that there are very weak welfare-based arguments in favor of the "trade account first" sequencing. The analysis also suggests that an early reform of the labor market will generally be welfare improving.