The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios

28 Pages Posted: 16 Jul 2004

See all articles by Sebastian Edwards

Sebastian Edwards

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER)

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: December 1983

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

Edwards, Sebastian and van Wijnbergen, Sweder, The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios (December 1983). NBER Working Paper No. w1245. Available at SSRN: https://ssrn.com/abstract=321300

Sebastian Edwards (Contact Author)

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area ( email )

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Sweder Van Wijnbergen

Universiteit van Amsterdam ( email )

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Tinbergen Institute

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Netherlands

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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