Abstract

The liberalization of trade in one country may be analyzed in two ways: either making use of 'orthodox macroeconomics' or taking into account the political economy of the agents involved. Both approaches, however, are linked to one another: if all agents have rational expectations and if they fulfil promises given, the adjustment process after a trade liberalization can be investigated in the traditional sense. Thus, orthodox analysis is a special case of the political economy approach. With regard to the sequence in which the trade and the capital account should be opened, the traditional and the political economy approach lead to opposite conclusions. This is primarily due to the fact that reasons for governments to stop or even reverse such programs may evolve which are not considered in the traditional, orthodox analysis. Whereas the latter sees the timing of liberalization measures as dependent from the costs of adjustment, the political economy approach covers the acceptance of these policies by major social groups and the risks which arise from the lobbyism of pressure groups. Country experiences from Latin America tend to show, that in praxi the capital account was more often liberalized before the trade account rather than the other way around. Also, one could observe a gradual introduction of liberalization programs. Basically, it seems to be much more important to follow a certain sequence to the end than to choose the possibly ideal sequence but to break it off sooner or later. There is hardly any country, however, where it is believed that the government will follow through as announced.