1492. Trade Policies, Macroeconomic Adjustment, and Manufactured Exports: The Latin American Experience
Sarath Rajapatirana
(August 1995)
Trade policies cannot resolve current account problems. Their effect on the
current account disappears after three years.
Rajapatirana examines the relationship between trade policies and
macroeconomic adjustment in six Latin American countries: Argentina, Brazil,
Chile, Colombia, Costa Rica, and Mexico.
For the period 196594, the six countries experienced 26 trade policy
episodes: 11 of tightening, and 15 of loosening trade policies.
For the analysis, Rajapatirana worked with four periods that coincided with
different prevailing exchange rate regimes: 196573, 197479, 198083, and
198494. Using a probit model, he examined the relationship between tightening
and loosening trade policies and the current account balance, the exchange rate,
and the growth in manufacturing exports. His main conclusions:
- Experience in these six countries for 196594 confirmed the hypothesis that
trade restrictions cannot solve current account problems.
- For trade liberalization to work, there must be real devaluation either
before or during liberalization. Reluctance to devalue, for one reason or
another, may lead to trade restrictions. There is evidence that trade
restrictions were used in lieu of devaluations during 196583. In 198494,
however, the reluctance to devalue was overcome.
- Growth in manufactured exports helps maintain trade reform and release the
economy from foreign exchange constraints. As expected, trade liberalization
improved exports (liberalization reduces the bias against exports) while trade
tightening hurt them.
- The impact of trade reform on the fiscal system cannot be predicted because
tax revenues can go in either direction depending on initial conditions, the
elasticity of supply in importable and exportable sectors, and the economy's
growth rate.
This paper---a product of the Advisory Group, Latin America and the Caribbean
Technical Department---is part of a larger effort in the department to
disseminate lessons about policy and institutional reform that are relevant to
the region. Copies of the paper are available free from the World Bank, 1818 H
Street NW, Washington, DC 20433. Please contact Joy Troncoso, room I8-314,
telephone 202-473-7826, fax 202-676-0239, Internet address
jtroncoso@worldbank.org (34 pages).
The full report is available on our FTP server.