government will sustain it, investment and labour will not shift to the export
sector. Liberalization will then lead to an import surge and no export response
and the reform effort will likely collapse in face of an unsustainable balance-
of-payments deficit (Rodrik, 1989).
The government can undertake efforts to enhance the credibility of reform
by convincing the private sector of its commitment to reform, reducing any
possible future incentives to reverse policies, and making it more difficult to
change course if such temptation does nonetheless arise. A good example of
such efforts is to sign international treaties to join up with a free trade bloc.
Such agreements were when Eastern European countries have joined the EU to
lock in free trade after the collapse of communism, or in Mexico’s decision to
join NAFTA. A crisis may make reforms easier to implement. In Poland in the
early 1990s a macroeconomic crisis motivated a new leadership to implement
reform including trade liberalization and provided an outgoing leadership and
ideology (communism) to take the political blame for any problems experi-
enced. The 1980s world debt crisis gave the IMF/World Bank great leverage in
pushing for the implementation of sustained trade liberalization, especially in
poorer African countries.
Trade liberalization and government revenue
Trade liberalization in a developing country will almost inevitably lead to a
loss of government revenue and so force fiscal adjustment elsewhere. The
structural features typical of a developing country include the large dispersed,
low-income subsistence sector in agriculture and small-scale informal sector
in urban areas,the weakness of the tax administration, and the lack of good
accounting systems which together make raising tax revenue from income and
consumption taxes very difficult. Imports tend to enter a country through a few
ports and airports so are usually easier to collect taxes on than millions of
income earners or consumers or thousands of (small) businesses. In the 1990s
trade taxes (predictably) contributed almost 35 per cent of tax revenue in low-
income countries and less than 1 per cent in high-income countries. It is not
therefore just a trade-policy choice that developing countries have relied on
import tariffs to raise tax revenue. A dataset of 80 countries between 1970 and
the late 1980s shows that developing countries, especially the lowest-income
countries, suffered declining tax revenues as a result of trade liberalization,
which forced reductions in infrastructure and education spending (Khattry and
Rao, 2002; Khattry, 2003).
Openness and the bigger picture: power, ideas and consumption
So far this chapter has focused on the narrower question of trade in goods. The
influence of openness is potentially far more general: openness can encompass
power or ideas and can transform people’s living conditions.
International Trade, Openness and Integration 283