Working Paper: NBER ID: w3947
Authors: Dani Rodrik
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.
Keywords: Trade Liberalization; Political Economy; Developing Countries
JEL Codes: F13; F14; O19
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| PCBR of policy reform (D78) | political resistance to trade reform (F13) |
| macroeconomic crisis (E66) | political viability of trade reform (F13) |
| macroeconomic crisis (E66) | urgency of situation (H12) |
| urgency of situation (H12) | diminished importance of distributional concerns (D39) |