Trade Liberalisation in Developing Economies: Modest Benefits but Problems with Productivity Growth, Macro Prices, and Income Distribution

Microeconomically, the case for liberalisation is dubious under increasing returns to scale and when firms can invest directly in productivity enhancement. Distributional effects of commercial policy changes can be regressive and large, but the ‘rents’ they generate can serve as a basis for effective policy intervention contingent on firms' performance. Macroeconomically, the case of liberalisation rests on Say's Law, which is not always enforced. Recent combined current and capital market liberalisations have been associated with strong exchange rates and high interest rates and output and productivity growth have positive mutual feedbacks which liberalisation may well suppress.