Does Regionalism Affect Trade Liberalization Towards Non-Members?

We examine the effect of regionalism on unilateral trade liberalization using industry-level data on applied MFN tariffs and bilateral preferences for ten Latin American countries from 1990 to 2001. We find that preferential tariff reduction in a given sector leads to a reduction in the external (MFN) tariff in that sector. External liberalization is greater if preferences are granted to important suppliers. However, these "complementarity effects" of preferential liberalization on external liberalization do not arise in customs unions. Overall, our results suggest that concerns about a negative effect of preferential liberalization on external trade liberalization are unfounded.regionalism, external tariffs, trade liberalization

Volatile capital flows: Interactions between de jure and de facto financial liberalization

Utilizing a panel data set for 13 developed economies, this paper examines the volatility of capital flows following the liberalization of financial markets. The paper focuses on the response of foreign direct investment, portfolio flows, and other debt flows to both financial liberalization and increased capital flows. The regression analysis examines how capital volatility is affected by the interaction between de jure financial liberalization (an index of liberalization) and de facto liberalization (the volume of capital flows). At average and high volumes of capital, financial liberalization is found to increase capital volatility as expected. At lower volumes of capital, financial liberalization reduces capital volatility, particularly for foreign direct investment and other flows, indicating there may be a threshold level of capital flows below which financial liberalization reduces volatility.volatility

Democracy and prosperity in two decades of transition

This paper revisits the relation between democracy, liberalization, and prosperity in transition countries, using a panel of 25 countries over 19 years. Earlier investigations found political and economic liberalization to be positively correlated whereas the relation between political liberalization and prosperity remained unclear. In this paper, a hump-shaped relationship between political liberalization and growth is found, such that a rise in democracy levels promotes growth only under initially low democracy levels. Furthermore, economic and political liberalization turn out to be positively related, but with surprisingly small coefficients. --Transition Economics,Public Choice,Democracy,Growth

Capital Account Liberalization and Economic Performance: Survey and Synthesis

This paper reviews the literature on the effects of capital account liberalization and stock market liberalization on economic growth. The various empirical measures used to gauge the presence of controls on capital account transactions as well as indicators of stock market liberalization are discussed. We compare detailed measures of capital account controls that attempt to capture the intensity of enforcement with others that simply capture whether or not controls are present. Our review of the literature shows the contrasting results that have been obtained. These differences may reflect differences in country coverage, sample periods and indicators of liberalization. In order to reconcile these differences, we present new estimates of the effects on growth of capital account liberalization and stock market liberalization. We find some support for a positive effect of capital account liberalization on growth, especially for developing countries.

Economic Reform, Democracy and Growth During Post-Communist Transition

This paper explores interactions between growth, economic liberalization and democratization during transition. The results can be summarized as follows: (1) Liberalization has a strong positive effect on growth during transition (also when controlling for endogeneity of liberalization in growth). (2) Democracy facilitates economic liberalization. (3) Because of its effect on liberalization, democracy has a positive overall effect on growth. Nevertheless, the marginal effect of democracy (after controlling for progress in economic liberalization) is negative during early transition. (4) The progress in democratization in turn depends on past economic performance in a surprising manner-the relationship between past growth and subsequent democracy appears negative. (5) Economic performance is an important determinant of electoral outcomes and, in particular, of support for reforms.Democracy, LIberalization, Economic Performance and Elections

Inequality and Sequence of Economic Liberalization and Democratization

Some recent empirical studies found positive effects of economic liberalization on democratization. Based on these findings, this paper explains why the sequence of economic liberalization and democratization is related to the effects of the two reforms on economic performance. Since economic liberalization increases the probability of democratization and democratization leads to income redistribution, in an economy with large inequality between the elite and the poor, the elite do not implement economic liberalization, and democratization occurs first. In such an economy, the effects of economic liberalization and democratization are lower because of distortions caused by large-scale income redistribution.

The Degree of Financial Liberalization and Aggregated Stock-return Volatility in Emerging Markets

In this study, we address whether the degree of financial liberalization affects the aggregated total volatility of stock returns by considering the time-varying nature of financial liberalization. We also explore channels through which the degree of financial liberalization impacts aggregated total volatility. We document a negative relation to the degree of financial liberalization after controlling for size, liquidity, country, and crisis effects, especially for small and medium-sized markets. Moreover, the degree of financial liberalization transmits its negative impact on aggregated total volatility through aggregated idiosyncratic and local volatilities. Overall, our results provide evidence in favor of the view that the broadening of the investor base due to the increasing degree of financial liberalization causes a reduction in the total volatility of stock returns.return volatility;financial liberalization;market integration;volatility decomposition;emerging markets

Liberalization, Growth, and Financial Crises: Lessons from Mexico and the Developing World

Although the case for trade liberalization is now well established, the case for financial liberalization is not, because the latter is associated with lending booms and crises. Some critics invoke as evidence the recent weak growth of Mexico, a prominent liberalizer. We argue that liberalization is beneficial despite the occurrence of crises. First, we show that financial liberalization has typically followed trade liberalization, and that both have led to faster growth, despite more frequent booms and busts. Second, we present a model that shows why, in countries with severe credit market imperfections, liberalization leads to faster growth and, as a by-product, to financial fragility. Third, comparing Mexico with this international norm, we show that liberalization and NAFTA have induced faster growth and investment but have not been enough: lack of structural reform and a protracted credit crunch generated bottlenecks that blocked further growth and led to a slowdown in exports.Mexico, bank, growth, financial crisis, macroeconomics

Free trade and inclusive development: lessons from the Indian experience

This repository item contains a single issue of Issues in Brief, a series of policy briefs that began publishing in 2008 by the Boston University Frederick S. Pardee Center for the Study of the Longer-Range Future.Can trade liberalization result in long-term economic growth for developing countries? In this Issues in Brief, Pardee Center Post-doctoral Fellow Suranjana Nabar-Bhaduri argues that the experiences of Latin America and, more recently, India, have shown that liberalization must be complemented by industrial and employment generation policies if the process of economic growth is to be made more sustainable and inclusive. She compares both the policies in place and the employment and productivity numbers for pre- and post-liberalization India, and suggests industrial and employment policies need to be coupled with trade liberalization for a positive outcome

Some Simple Analytics of Trade and Labor Mobility

We study a simple, tractable model of labor adjustment in a trade model that allows us to analyze the economy's dynamic response to trade liberalization. Since it is a neoclassical market-clearing model, we can use duality techniques to study the equilibrium, and despite its simplicity a rich variety of properties emerge. The model generates gross flows of labor across industries, even in the steady state; persistent wage differentials across industries; gradual adjustment to a liberalization; and anticipatory adjustment to a pre-announced liberalization. Pre-announcement makes liberalization less attractive to export-sector workers and more attractive to import-sector workers, eventually making workers unanimous either in favor of or in opposition to liberalization. Based on these results, we identify many pitfalls to conventional methods of empirical study of trade liberalization that are based on static models.