Working Paper: NBER ID: w1507
Authors: Sebastian Edwards
Abstract: The opening up of an economy to the rest of the world has generally been considered an integral part of economic reform aimed at increasing the role of markets. Until recently, however, very little discussion was devoted to the order in which the capital and current account should be liberalized indeveloping countries.This paper deals with several aspects of the order of liberalization. The different arguments usually given to advocate a particular ordering are critically reviewed. Then a three-good two-factor model is used to analyze the effects of alternative ordering on production and income distribution. A two-period model of a small economy is also used to investigate the welfare effects of opening the capital account in the presence of distortions. While the discussion does not yield a theorem regarding the appropriate order of liberalization, there are strong presumptions that it is more prudent to liberalize the current account first.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| order of liberalization (P39) | macroeconomic stability (E60) |
| opening of capital account (F32) | destabilizing capital flows (F32) |
| opening of capital account (F32) | real appreciation of currency (F31) |
| real appreciation of currency (F31) | negative effects on tradeable goods sector (F69) |
| capital inflows used for consumption (E21) | welfare may not deteriorate (I30) |
| capital inflows used for investment (F21) | welfare effects depend on usage (D69) |