# IV. Balanced vs. Unbalanced Integration

Table 4 shows preconditions, liberalization, and end results of trade reformns for 24 major reformners from the mid 1980s to the early 1990s.<sup>27</sup> Trade liberalization during this period encompassed not only a reduction in the anti-export bias of the trade regime and an increased reliance on price mechanisms, but also a reduced level of intervention.

After evaluating reform episodes up to the mid 1980s, Thomas and Nash, and Michaely, Papageorgiou, and Choksi argued that macroeconomic stability and restraint of inflation have been critical factors in the success of trade reform.<sup>28</sup> Their studies also suggested that countries that have been most successful in implementing reform have first transformed quantitative restrictions (QRs) into tariffs, and then gradually lowered these tariffs and made them uniform. Further, they suggested that direct incentives to exports have not been as important to export growth as real devaluation and import liberalization, and at the same time, that exporters' access to imported inputs has been more important for export growth than have general export subsidies. There is also general consensus that the success of trade reform will be limited if it is not accompanied by removal of domestic distortions. The importance of sustained real devaluation for the success of reform for countries with overvalued currencies has been repeatedly stressed in many studies. Removal of import restrictions under foreign exchange shortage due to overvalued rates and tight exchange controls is ineffective. Bearing these arguments in mind, Table 4 shows changes in average tariff rates, quantitative restrictions, the average black market premium, 9 and real effective exchange rates before and after the reform. Trade integration (openness) indices, both aggregate and by exports and imports, measure the end results of the reform. Regional charts (charts 13-15) in the following sections demonstrate the existence of anti-export bias (by the movements in real effective exchange rates) and balance of the trade reforms (in relative movements in export and import integration before and after the major reform initiatives). **30** In the mid 1980s, all four South Asian countries still protected their importcompeting sectors with very high tariffs. Between 1985 and 1990, with the exception of Sri Lanka, the pattern of reform in this region was one of moving toward a more neutral

> 27 This table is based, among other sources, on various tables in Dean, Desai, and Riedel, "Trade Policy Reform in Developing Countries since 1985: A Review of the Evidence." General descriptions of reforms for each region in this section also owe a great deal to this review.

> **23** Vinod Thomas, J. Nash and Associates, _Best Practices in Trade Policy Reform;_ and Michael Michaely, Armeane M. Choksi, and Demetris Papageorgiou, _Liberalizing Foreign Trade: Lessons of Experience in the Developing World,_ 1991.

> **29** As a measure of price distortions and foreign exchange controls, a larger black market foreign exchange premium means a higher degree of anti-export bias.

> **30** Charts 13-16 show the balance between export and import integration by presenting trend rates of changes in export/GDP ratio and import/GDP ratio before and after the year of major reform (see Table 4). If the economy is skewed in the direction of import integration-often associated with appreciation in real effective exchange rate-it tends to have balance of payment difficulties (e.g., Mexico).

28