An Institutional Analysis of the Design and Sequence of Trade and Investment Policy Reform

Abstract

Countries vary in their political commitment to change and in the capability of their bureaucracies. Policies vary in their organizational and political demands. These institutional variations can be incorporated into the design of trade and investment policy reform. In virtually all countries the presumption should be for reforms to dismantlenot reconfigure-restrictive entry rules and dysfunctional discretionary investment incentives. But there is no single approach, common across countries, through which trade policy reform sbould proceed. Countries with weak administrative capabilities should push import liberalization to the limits. But politically constrained countries with a stronger administrative capability might consider roundabout reforms that secure outward orientation without full-scale, prior import liberalization. During the past decade, it has become apparent that efforts to reform trade and investment policy in developing countries have had uneven results. A number of studies have sought to account for this uneven record by going beyond the narrow concerns of the optimal design of economic policies. One approach, reviewed by Paul (1990), has been to highlight problems in implementation as the source of weaknesses and to imply that these can be overcome by improving institutional capability. A second approach, exemplified by the burgeoning literature on neoclassical political economy (Colander 1984; Rodrik 1992) has been to probe into the underlying political determinants of a country's ability and willingness to adopt and implement trade and investment policy reforms. Taken alone, each of these approaches is too narrow. Countries vary both in their political commitment to change and in the organizational capability of public bureaucracies. Moreover, policies vary significantly in their organizational as well as political demands. It follows that the mix and sequence of reforms should be quite different in countries where the political commitment to policy reform is strong but organizational capabilities are relatively weak than in countries that have strong organizational capabilities but only limited political commitment to reform. This article illustrates in some detail how these crosscountry variations in institutional capabilities can be most effectively incorporated into the design and sequencing of programs of trade and investment policy reform.