What is the Optimal Rate of Liberalization?

30 Aug

Two articles in the latest issue of Foreign Policy–one by Robert Reich on capitalism and democracy (subscription only), and the other by Moisés Naím on the paradox of free-trade–got me thinking about what the optimal rate of liberalization might be and what sort of research had be done on the subject. As Reich points out:

But though free markets have brought unprecedented prosperity to many, they have been accompanied by widening inequalities of income and wealth, heightened job insecurity, and environmental hazards such as global warming.

This is one of the essential challenges of globalization: making sure that prosperity is broadly shared enough so that economic development isn’t derailed by the political process. If people start to get freaked out by the new private companies moving in down the street, or feel that their wages or security are threatened by a new trade deal, they’ll (rationally) seek redress through their political representatives. After that, it’s tariffs and protectionism, which might benefit some sectors of an economy but make the macroeconomy worse off. So how do you open markets without scaring the crap out of the electorate?

An admittedly limited search found only one article from 1997 that explicitly addressed the optimal rate of liberalization (in this case, trade liberalization) and it did so in the context of firm restructuring (PDF). It concludes that gradual liberalization may be better for a country with long-term development goals, while a faster, “big-bang” approach might be useful for short-term economic goals (because gradualism in an already competitive sector only encourages inefficient firms to hang around longer, reducing profits and souring people on the new reforms).

I’m sure that this sort of thing is hard to quantify or calculate; any optimal rate would depend upon factors like existing level of economic development, political openness, the sorts of political and civil institutions in country, and the available capital (natural and human). Those are a lot of factors to model. The answer might just be to liberalize as fast as the electorate can bear, with some of the “New Deal for Globalization” measures (from a July/August Foreign Affairs article) thrown in to alleviate anxieties and spread some of the costs around. These policy suggestions from Dan Drezner also seem like a way to avoid a mass of bandanna-clad protesters from marching on the capitol building and decrying the latest round of trade negotiations (and though the tear gas industry may be elated, it doesn’t do so much for the political process).

But this feels like policy afterthought rather than an actual plan for smoother liberalization. Suggestions?

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