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Trade liberalization is more important to Eastern and Central European economies than to reforming nonsocialist economies - and will also benefit the reforming socialist economies more. But it must be accompanied, or quickly followed, by rapid privatization.
Can knowledge of financial policies in developing countries over four decades help the socialist economies of Asia and Eastern Europe become open market economies in the 1990s? In all these countries the loss of fiscal and monetary control has often resulted in high inflation that undermines the liberalization process itself. In the second edition of The Order of Economic Liberalization, Ronald McKinnon builds on his influential work on the liberalization of financial markets in less developed countries and outlines the progression necessary to move from a "repressed" to an open economy. New to this edition are chapters that contrast the gradual Chinese approach to liberalizing domestic and foreign trade with the "big bang" approach followed by some Eastern European countries and republics of the former Soviet Union. Financial control and macroeconomic stability, McKinnon argues, are more critical to a successful transition than is any crash program to privatize state-owned industrial assets and the banking system.
The author has virtually incomparable experience in both providing trade policy advice to more than 25 countries on behalf of the World Bank and also publishing quality journal articles in most of those cases. In this volume, he focuses on his work on: (i) trade policies for countries making the transition from planned to market economies; (ii) his trade policy guideline papers for the World Bank on trade policies for poverty alleviation, uniform tariff policy, adjustment costs of trade liberalization, exchange rate overvaluation, globalization and technology transfer and rules of thumb on regional trade policies; (iii) multilateral, dynamic and environmental issues in trade policy using computable general equilibrium models; (iv) trade policy of the United States in the auto and steel industries; and (v) mathematical methods for modeling. The papers show an unusual combination of policy relevance, advice and impact, with rigor and international trade theory insights. The papers in this volume have appeared in many of the economics profession's more prestigious journals, including Econometrica, Review of Economic Studies, Quarterly Journal of Economics, Economic Journal, the Journal of International Economics, International Economic Review, European Economic Review, Canadian Journal of Economics, Economic Inquiry, the Journal of Comparative Economic, Review of International Economics, World Economy, the Southern Economic Journal, the World Bank Economic Review, the Japanese Economic Review and the Latin American Journal of Economics. In this book, the author elaborates on the articles by discussing some of the policy contexts for the requests for the work from developing and transition countries to the World Bank, the key trade theory or policy insights, policy recommendations and conclusions and the policy impacts.
The author examines the special role that trade liberalization in services industries can play in stimulating trade in both services, and goods. International trade in goods requires inputs from such trade services as transportation, insurance, and finance, for example. Restrictions on services across borders, and within foreign countries add costs, and barriers to international trade. Liberalizing trade in services could also facilitate trade in goods, providing more benefits than one might expect from analysis merely of the services trade. To emphasize the point, the author notes that the benefits for trade are arguably enhanced by the phenomenon of fragmentation. The more that production processes become split across locations, with the fragments tied together, and coordinated by various trade services, the greater the gains from reductions in the costs of services. The incentives for such fragmentation can be greater across countries, than within countries, because of the greater differences in factor prices, and technologies. But the service costs of international fragmentation can also be larger, especially if regulations, and restrictions impede the international provision of services. As a result, trade liberalization in services can stimulate the fragmentation of production of both goods, and services, thus increasing international trade, and the gains from trade even further. Since fragmentation seems to characterize an increasing portion of world specialization, the importance of service liberalization is growing apace.
This compelling two-volume collection presents the major literary contributions to the economic analysis of the consequences of trade liberalization on growth, productivity, labor market outcomes and economic inequality. Examining the classical theories that stress gains from trade stemming from comparative advantage, the selection also comprises more recent theories of imperfect competition, where any potential gains from trade can stem from competitive effects or the international transmission of knowledge. Empirical contributions provide evidence regarding the explanatory power of these various theories, including work on the effects of trade openness on economic growth, wages, and income inequality, as well as evidence on the effects of trade on firm productivity, entry and exit. Prefaced by an original introduction from the editor, the collection will to be an invaluable research resource for academics, practitioners and those drawn to this fascinating topic.
Trade liberalization leads to long-run gains, but it can also involve costly short-run macroeconomic adjustment. The paper explores the relative importance of these effects within a dynamic general equilibrium model that captures key elements of both international trade and macroeconomic models. The welfare effect of trade liberalization is decomposed into a steady-state efficiency gain and a transitional loss associated with wage-price stickiness. Our estimates show that the transitional loss is small relative to the steady-state gain, and tends to be lower under flexible as compared to fixed exchange rates. We also show that the loss can be reduced further by a flexible price-level targeting policy rule.
Abstract: In this paper, we analyze the transition dynamics associated with an economy's response to trade liberalization. We start by reviewing the recent literature that incorporates firm dynamics into models of international trade. We then build upon that literature to characterize the role of firm dynamics, export-market selection, firm-level innovation, and firms' expectations regarding the time path of liberalization in generating those transition dynamics following trade liberalization. These modeling ingredients generate substantial aggregate transition dynamics as they shift and shape the endogenous distribution of firms over time. Our results show how the responses of trade volumes, innovation, and aggregate output can vary greatly over time depending on those modeling ingredients. This has important consequences for many issues in international economics that rely on predictions for the effects of globalization over time on those key aggregate outcomes