The impact of trade liberalisation on exports, imports and the balance of payments in selected developing countries

Trade liberalisation is assumed to improve a country’s performance by promoting domestic economic efficiency and by encouraging trade flows between nations, according to the supply side/orthodox plethora of studies. The limited empirical evidence related to the balance of payments and trade liberalisation that exists suggests that import flows respond more rapidly than exports following trade liberalisation, causing ‘temporary’ trade imbalances. This thesis extends this existing evidence by examining the effect of liberalisation on export growth, import growth, the trade balance and the balance of payments for a geographically diverse sample of 22 developing countries over the period 1972 to 1998.

The impact of trade liberalisation is measured by changes in duties on exports and imports, and by an indicator for the years in which significant trade liberalisation took place. Differences between countries in Africa, Latin America, East Asia and South Asia are explored, as is the importance of the degree of protection afforded by the trade regime.

The central findings are that exports react favourably to decreases in export duties, though the impact is relatively small, but trade liberalisation emerges as a significant positive determinant of export growth. The results indicate that import duty reductions raise import growth, but the effect varies according to the region and type of trade policy regime existing in the country, and trade liberalisation has a strong, positive impact on import growth. On balance, trade liberalisation worsens the trade balance by nearly two percent of GDP. While all regions suffered deterioration in their trade balance, Africa has been particularly severely affected. The negative impact of liberalisation is greater in countries which have liberalised from a more highly protected regime.

A case study for the Dominican Republic (DR) shows that trade liberalisation has raised the rate of growth of exports and imports, and that the trade balance has improved, suggesting that the DR has not suffered deterioration as other countries in the sample, following trade policy reform.