Liberalizing Foreign Trade, vol. 7, Lessons of Experience in the Developing World.

Tower, Edward

Liberalizing Foreign Trade, Volume 7: Lessons of Experience in the Developing World.

Edited by Michael Michaely, Demetris Papageorgiou and Armeane M. Choksi. Cambridge, Mass.: Blackwell, 1991. Pp. xxiv, 440. $75.00.(1)

This volume synthesizes the results of studies of liberalization experiences in 19 countries by 32 authors carries out at the World Bank and directed by the editors. Only the most somber economist would be unimpressed by the cover design which features gilt lettering on a forest green plaque on a crimson background. Perhaps this symbolizes the elegance of free market solutions, and their ability to stimulate economic growth in what were previously command economies.

All will appreciate the user friendliness of the volume. Each chapter is introduced by an executive summary in huge print. The material is well organized, and the graphs are plentiful and useful. These chapters are followed by a concluding chapter, which suggests broad rules to follow in designing a liberalization policy. Three appendices close the volume: A straightforward piece on the relevant partial equilibrium theory of liberalization, with focus on QRs and monopoly power a piece which uses regression analysis to test hypotheses; and a set of useful short sketches of the 19 country experiences with liberalization.

I was disappointed in reading the book that my way of thinking about trade restrictions and liberalization wasn't altered significantly. I missed the excitement that I got from changing my conceptual framework for approaching liberalization that came from reading the synthesis volumes in the Bhagwati-Krueger NBER series. In some cases, I would have liked the authors to have speculated further on the reasons behind their empirical results. For example, why is export performance prior to the liberalization correlated positively with the survival of the liberalization? I can think of reasons why the correlation might be negative. But, I was reassured that the findings in the earlier series hold up. As in the B-K series there are analyses of the effects of liberalization. But here is more focus on what circumstances stimulate liberalization and what circumstances sustain it.

Parts of this book should be required reading in trade and development courses from the undergraduate level on, because the results are interesting, and the qualities of structure and exposition are worth emulating. The structure of the book and clarity of exposition make the volume easy to use by economists, policy makers, graduate students and upper level undergraduates.

Here are the points that I found most intriguing:

Chapter 3.". . . once a liberalization experiment lasts five years without reversal, it is most likely to be sustained over the long run. This may be because . . . a period of six years is adequate to establish a pervasive interest in the survival of liberalization."

Chapter 4. "Liberalizations introduced "under distress" have tended to be intense (strong and rapid) and have consequently also tended to survive better than other liberalization experiments. Those implemented under "placid" circumstances have survived nearly as well, particularly when they followed earlier successful liberalizations."

Chapter 5. Pre-announcement of the liberalization process fosters sustainability of the liberalization. This presumably reflects the effect of pre-announcement on reducing rent transfer and unemployment.

Chapter 6. Empirically, liberalization doesn't cause unemployment. Nor does unemployment abort the liberalization process.

Chapter 7. ". . . right from the beginning, liberalization, clearly tends to accelerate economic growth."

Chapter 8. ". . . no comprehensive change in the pattern of income distribution has been involved."

Chapter 9. Liberalizers relative to nonliberalizers tend to be smaller, and resource-poorer, with higher per-capita income, more education, more political stability, more rapid export growth, lower budgetary deficits, less government expenditure and more stable real foreign exchange rates.

Chapter 10. "...liberalization is likely to survive when it starts with a major relaxation of QRs, and to fail otherwise." Real currency depreciation also helps.

Chapter 11. "The impact effect of liberalization on the balance of payments appears commonly to be favorable." Moreover, both imports and exports increase.

Chapter 12. Export incentive policies do not stimulate exports. Eliminating import restrictions has a large positive impact on export growth.

Chapter 13. Liberalization "is likely to be sustained when the real exchange rate increases, and to collapse when it falls.

Chapter 14. "A sustained liberalization episode is likely to be accompanied by either restrictive or, at least, "neutral" fiscal and monetary policies. When macroeconomic policies are expansionary toward the close of an episode, on the other hand, the liberalization tends either to collapse totally or, at best, to be partially sustained."

Chapter 15. Liberalization of the capital market is likely to lead to a temporary capital inflow and a real currency appreciation, which depresses tradeable activities, followed by a capital outflow, which creates a balance-of-payments problem. The depression of tradeable activities reduces the popularity of the program, and the ensuing balance-of-payments difficulties often result in import controls. Consequently, "A capital market liberalization undertaken before trade liberalization, and the adjustment to it, are well advanced is thus likely to make trade liberalization unsustainable."

There are important unanswered questions. Here are a few: is it important to reform internal markets for capital and labor before liberalizing trade? What kinds of policies minimize transitional unemployment? Should tax reform, budgetary reform, regulatory reform and privatization come before trade liberalization? The book gives encouragement to would be liberalizers, but leaves important questions about the design of optimal or sensible policy packages unanswered. Still, this is a book which no development or international economist can afford to be unfamiliar with, and no academic library can afford to be without. The questions raised, answers provided and the further questions suggested are interesting and important. (1)Thanks go to Ira Gang and Tom Willett for comments. Edward Tower Duke and Nanjing Universities