DP832 Trade Liberalization in Disinflation

Author(s): Dani Rodrik
Publication Date: August 1993
Keyword(s): Disinflation, Trade Policy
JEL(s): E31, F13, F31
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=832

There exists near-consensus among professional economists on the desirability of achieving macroeconomic stabilization prior to the removal of microeconomic distortions. Yet this advice was completely disregarded in some of the most important cases of reform during the last decade -- Bolivia and Mexico since 1985, Poland since 1990, Argentina since 1991, for example. In these and many other cases, radical trade liberalization measures were put in place, or existing programmes speeded up, in conjunction with macroeconomic stabilization packages. In this paper I revisit this issue by focusing on recent liberalizations in Latin America. I argue that the theoretical case for the existence of a policy dilemma in exchange rate management when trade liberalization is implemented simultaneously with stabilization policies is weaker than is usually presupposed. A commitment to a pegged exchange rate can, if credible, actually solve rather than intensify the potential conflict between trade liberalization and exchange rate stability. The credibility of disinflation may be endangered by early liberalization, however.