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

48 Pages Posted: 28 Dec 2002 Last revised: 16 Nov 2014

See all articles by Dani Rodrik

Dani Rodrik

Harvard University - Harvard Kennedy School (HKS); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: January 1992

Abstract

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.

Suggested Citation

Rodrik, Dani, The Rush to Free Trade in the Developing World: Why so Late? Why Now? Will it Last? (January 1992). NBER Working Paper No. w3947. Available at SSRN: https://ssrn.com/abstract=227366

Dani Rodrik (Contact Author)

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