School of Economics

2005 Discussion Papers

School of Economics Discussion Paper 05/05
July 2005

Trade Liberalisation, the Balance of Payments and Growth in Latin America
Penélope Pacheco-López and A.P. Thirlwall

School of Economics
University of Kent at Canterbury

Abstract

The broad purpose of trade liberalisation is to raise the rate of growth of countries on a sustainable basis, consistent with the achievement of other macroeconomic objectives. In this paper we consider whether trade liberalisation in seventeen countries of Latin America has improved the trade-off between GDP growth and the trade balance, allowing the countries to grow faster without sacrificing foreign exchange. We find that in the aftermath of liberalisation, the majority of countries did grow faster, but at the expense of a deteriorating trade balance. Testing formally for the impact of trade liberalisation in a full model of trade balance determination, we find that only in Chile and Venezuela has the trade-off unequivocally improved. In other countries there has been a significant deterioration or no change. Nine out of the seventeen countries have grown faster post-liberalisation than pre-liberalisation but, except for Chile and Venezuela, at the expense of a wider trade or current account deficit.

JEL Classification: C21; C22; F13; F32; F43

Keywords: Latin America; Trade Liberalisation; Growth; Balance of Payments

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