The Political Economy of Economic Liberalization

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Abstract
Two of the major policy problems facing governments of developing countries in the 1980s have been unsustainable external and internal disequilibria, and implementation of politically feasible stabilization cum liberalization programs which become necessary to correct these imbalances. This article discusses these “crises” and subsequent policy reform. The analysis suggests that balance of payments and fiscal deficits are frequently the result of use of an incorrect accounting system in a fixed exchange rate economy, and of public sector expansion beyond its economically feasible size; that governments usually seek to liberalize their economies during a crisis to regain control when the growth of the “transfer State” has led to generalized tax resistance, avoidance, or evasion; that reduction of the government role will be required to alleviate these crises; that sharp departures from past policies rather than gradual reform may be politically necessary; and that, contrary to the current technocratic opinion on this matter, the sequencing of a consistent and credible package of reforms which will most effectively reduce the costs of adjustment is initial liberalization of domestic capital markets simultaneous with cuts in the fiscal deficit, followed by floating the exchange rate and then commodity market liberalization.

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