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

Sebastian Edwards and Sweder van Wijnbergen

No 1245, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1983-12
Note: ITI IFM
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Citations: View citations in EconPapers (7)

Published as Edwards, Sebastian and Sweder van Wijnbergen. "The Welfare Effects of Tradeand Capital Market Liberalization." International Economic Review, Vol. 27 , No.1, (February 1986), pp. 141-148.

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Working Paper: The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios (1983)
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